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Banking

Banking

I. INTRODUCTION

Banking, transactions carried on by any individual or firm engaged in providing financial services to consumers, businesses, or government enterprises. In the broadest sense, banking consists of safeguarding and transfer of funds, lending or facilitating loans, guaranteeing creditworthiness, and exchange of money. These services are provided by such institutions as commercial banks, savings banks, trust companies, finance companies, and merchant banks or other institutions engaged in investment banking. A narrower and more common definition of banking is the acceptance, transfer, and, most important, creation of deposits. This includes such depository institutions as commercial banks, savings and loan associations (more common in the United States), building societies, and mutual savings banks. All countries subject banking to government regulation and supervision, normally implemented by central banking authorities. For further information on central banks and investment banking, see the relevant articles.

II. ASPECTS OF BANKING

The most basic role of banking, safeguarding funds, is done through vaults, safes, and secure facilities that physically store money. These physical deposits are in most cases insured against theft, and in most cases against the bank being unable to repay the funds. In some banks the service is extended to safe deposit boxes for valuables. Interest given on savings accounts, a percentage return on the bank’s investments with the money, gives an additional incentive to save. Transfer of funds can be handled through negotiable instruments, cheques, or direct transfers performed electronically. Credit cards and account debit cards, electronic cash tills, computer online banking, and other services provided by banks extend their usefulness by offering customers additional ways of gaining access to and using their funds. Automated clearing houses perform similar services for business customers by handling regular payments, such as wages, for a company banking with the bank. Longer-term schemes for providing regular income on savings are often offered through trust funds or other investment schemes.

III. EARLY BANKING

Many banking functions such as safeguarding funds, lending, guaranteeing loans, and exchanging money can be traced to the early days of recorded history. In medieval times the Knights Templar, an international military and religious order, not only stored valuables and granted loans but also arranged for the transfer of funds from one country to another. The great banking families of the Renaissance, such as the Medici in Florence, were involved in lending money and financing international trade. The first modern banks were established in the 17th century, notably the Riksbank in Sweden (1656) and the Bank of England (1694).

IV. BANKING IN BRITAIN

Aside from the Bank of England, which was incorporated, early English banks were privately owned rather than stock-issuing firms. Bank failures were not uncommon; so, in the early 19th century, joint-stock banks, with a larger capital base, were encouraged as a means of stabilizing the industry. By 1833 these corporate banks were permitted to accept and transfer deposits in London, although they were prohibited from issuing banknotes, a monopoly prerogative of the Bank of England. Corporate banking flourished after legislation in 1858 approved limited liability for joint-stock companies. The banking system, however, failed to preserve a large number of institutions; at the turn of the 20th century a wave of bank mergers reduced both the number of private and joint-stock banks.

V. BANKING IN THE UNITED STATES

The United States banking system differs radically from those in such countries as Canada, the United Kingdom, and Germany, where a handful of organizations dominate banking. In the past, geographical constraints on expansion prevented banks from moving beyond their state or even beyond their county. Thus, many small bankers were protected from competition.

VI. BANKING IN CONTINENTAL EUROPE

Major central banks in the European Union are France’s Banque de France, Germany’s Bundesbank, and the Bank of Italy. Major commercial banks include Germany’s Deutsche Bank A. G., Dresdner Bank A. G., and Commerzbank A. G.; France’s nationalized Banque Nationale de Paris, Crédit Lyonnais, Crédit Agricole, Groupe Caisse d’Epargne, and Société Générale; the Union Bank of Switzerland and the Swiss Bank Corporation; and ABN-Amro Bank and Rabobank Nederland in the Netherlands. Significant structural differences distinguish the banking system of continental Europe from that of many other developed nations. The main differences are in ownership, scope, and concentration of activities.

VII. BANKING IN SWITZERLAND

Switzerland is renowned as a centre for world banking because of its political neutrality, its financial stability, and the national tradition of confidentiality in banking, dating from a law of 1934 that made it an offence for banks to disclose details about their customers without express authorization. Subsequent legislative changes and international agreements have not overly compromised this secrecy, especially with regard to non-criminal tax evasion. Private banking is one of the country’s principal sources of income.

VIII. BANKING IN RUSSIA

Prior to 1987 and under the Communist rule of the Soviet state, the government owned and managed the banking system. By far the most important institution was the state bank, Gosbank, which acted as the central bank controlling currency and credit and the oversight of transactions among state enterprises.

IX. BANKING IN JAPAN

As one of the world’s richest countries, Japan has a banking sector with considerable influence on the world economy as a whole; it is also home to some of the world’s largest banks in terms of capital holdings. However, the banking system has undergone a massive shake-up since the mid-1990s, in part because of forced regulatory changes but mostly because of huge levels of debt and poor corporate governance.

X. BANKING IN CANADA

Canada has numerous chartered commercial banks. In 1980 Canadian banks were reorganized into two bands: “Schedule I”, with shareholdings by any individual limited to 10 per cent; and “Schedule II”, either foreign-owned or in private hands. Further legislation in 1992 freed banks, trust companies, and insurance companies to diversify into each other’s areas of interest, and opened ownership of Schedule II banks to non-banking institutions. Trust and mortgage loan companies, provincial savings banks, and credit unions are also important components of the banking system.

XI. BANKING IN AUSTRALIA

The Commonwealth Bank of Australia was established in 1911, offering a savings and general bank business and supported by federal guarantee. However, in 1959, with concerns that it was unethical to be both a central bank and a general bank, it was split into the Commonwealth Banking Corporation (which includes the Commonwealth Trading Bank and the Commonwealth Savings Bank) and the Reserve Bank of Australia.

XII. BANKING IN NEW ZEALAND

The Reserve Bank of New Zealand is the national central bank. The Reserve Bank is owned and operated by the government. Commercial banks are called trading banks, as in Australia: the Australia and New Zealand Banking Group and the Westpac Banking Corporation are both also represented in Australia. A long tradition of close government regulation and protection of commercial banks ended in 1987 with banking deregulation moves that opened the commercial market and introduced many new and foreign banks. Trustee savings banks are also prevalent, with former savings banks such as ASB Bank and Trust Bank having become important commercial banks following banking deregulation.

XIII. BANKING IN SINGAPORE

As one of the world’s major financial centres and a regional economic giant, Singapore has an internationally significant banking regime. Central banking functions are exercised by the Monetary Authority of Singapore, though issuing of currency is conducted by a separate government body. The domestic commercial banking industry in Singapore consists of some 13 local banks and is dominated by the leading houses. The Post Office Savings Bank serves as the national savings bank.

XIV. BANKING IN HONG KONG S. A. R.

As a British colony until 1997, Hong Kong S. A. R. benefited from British banking and contractual law and attracted international businesses, boosting a multinational banking presence. Now known as the Hong Kong Special Administrative Region (S. A. R.), it is under Chinese sovereignty but benefits from a large measure of self-rule and a continuing laissez-faire economy.

XV. BANKING IN CHINA

Scholars argue that they can trace a banking system in China to more than 2,000 years ago. Indeed, both coinage and paper money was pioneered in the country. Coins were often deposited with local or central government institutions in exchange for either paper money or credit certificates. These could be exchanged in provincial treasuries, boosting commerce. The domestic system developed, although the international trade financing of the mid-19th century saw western banks come to dominate the business.

XVI. BANKING IN INDIA

The central bank of India is the Reserve Bank: most large commercial banks were nationalized in 1969, with more being nationalized in 1980. The Department of Banking at the Ministry of Finance controls all banking. The State Bank of India, the largest and oldest commercial bank, handles some of the Reserve Bank’s roles. The other nationalized banks share the commercial market with non-nationalized and foreign banks.

XVII. OFFSHORE BANKING

The provision of offshore banking means that the jurisdiction offers regulatory and legal advantages for the depositor, often hand-in-hand with more sophisticated banking services than would normally be found in an average retail bank. In general these advantages include: low or zero tax rates, strict confidentiality, easy global access to accounts and services, and usually (although not always) political stability.

XVIII. BANKING IN DEVELOPING COUNTRIES

The type of national economic system that characterizes developing countries plays a crucial role in determining the nature of the banking system. In capitalist countries a system of private enterprise in banking prevails; in a number of socialist countries (for example, Egypt and Sudan) all banks have been nationalized. Other countries have patterned themselves after the liberal socialism of Europe; in Peru and Kenya, for instance, government-owned and privately owned banks coexist. In many countries the banking system developed under colonialism, with banks owned by institutions in the parent country.

XIX. ROLE OF CENTRAL BANKING

The foremost monetary institution in a free market economy is the central bank. These are usually government-owned institutions, but even in countries where they are owned by the nation’s banks (such as the United States), the responsibility of the central bank is to the national interest.

XX. INTERNATIONAL BANKING

The expansion of trade in recent decades has been paralleled by the growth of multinational banking. Banks have historically financed international trade, but the notable recent development has been the expansion of branches and subsidiaries that are physically located in other countries, as well as the increased volume of loans to borrowers internationally.

XXI. ISLAMIC BANKING

At its simplest, Islamic banking conforms to principles deemed important to religious practice and interpretations of shari’ah (Islamic) law, which are the guiding principles revealed in the Koran. Many of the principles are common to other religions, including Christianity and Judaism.

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