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    (Wikipedia) - Bank   (Redirected from Banking) "Banker" redirects here. For other uses, see Bank (disambiguation) and Banker (disambiguation).
    This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (July 2009)
    Banking
    A series on financial services:
    Types of banks
    • Central bank
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    A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank links customers that have capital deficits and customers with capital surpluses.

    Due to their importance in the financial system and influence on national economies, banks are highly regulated in most countries. Most nations have institutionalised a system known as fractional reserve banking, under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.

    Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy but in many ways was a continuation of ideas and concepts of credit and lending that had its roots in the ancient world. In the history of banking, a number of banking dynasties—notably the Medicis, the Fuggers, the Welsers, the Berenbergs, and the Rothschilds—have played a central role over many centuries. The oldest existing retail bank is Monte dei Paschi di Siena, while the oldest existing merchant bank is Berenberg Bank.

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    Main article: History of banking

    The origins of modern banking can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Lucca, Siena, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. One of the most famous Italian banks was the Medici Bank, set up by Giovanni di Bicci de'' Medici in 1397. The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy.

    Modern banking practice, including fractional reserve banking and the issue of banknotes, emerged in the 17th and 18th centuries. Merchants started to store their gold with the goldsmiths of London, who possessed private vaults, and charged a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee; these receipts could not be assigned, only the original depositor could collect the stored goods.

    The sealing of the Bank of England Charter (1694).

    Gradually the goldsmiths began to lend the money out on behalf of the depositor, which led to the development of modern banking practices; promissory notes (which evolved into banknotes) were issued for money deposited as a loan to the goldsmith. The goldsmith paid interest on these deposits. Since the promissory notes were payable on demand, and the advances (loans) to the goldsmith''s customers were repayable over a longer time period, this was an early form of fractional reserve banking. The promissory notes developed into an assignable instrument which could circulate as a safe and convenient form of money backed by the goldsmith''s promise to pay, allowing goldsmiths to advance loans with little risk of default. Thus, the goldsmiths of London became the forerunners of banking by creating new money based on credit.

    The Bank of England was the first to begin the permanent issue of banknotes, in 1695. The Royal Bank of Scotland established the first overdraft facility in 1728. By the beginning of the 19th century a bankers'' clearing house was established in London to allow multiple banks to clear transactions. The Rothschild''s pioneered international finance on a large scale, financing the purchase of the Suez canal for the British government.

    The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472. It is followed by Berenberg Bank of Hamburg (1590) and Sveriges Riksbank of Sweden (1668).

    Origin of the word

    The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.

    One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350–325 BC, presented in the British Museum in London. The coin shows a banker''s table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza (Τράπεζα) means both a table (in formal language) and a bank (in everyday speech). .

    Definition

    The definition of a bank varies from country to country. See the relevant country page (below) for more information.

    Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as:

    Banco de Venezuela in Coro.Branch of Nepal Bank in Pokhara, Eastern Nepal.

    In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of persons, whether incorporated or not, who carry on the business of banking'' (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank transactions such as cheques does not depend on how the bank is structured or regulated.

    The business of banking is in many English common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purpose of regulating and supervising banks rather than regulating the actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions:

  • receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than ... or with a period of call or notice of less than that period;
  • paying or collecting checks drawn by or paid in by customers.
  • Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect checks.

    Banking Standard activitiesLarge door to an old bank vault.

    Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers'' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and automated teller machine (ATM).

    Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending.

    Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account.

    Banks can create new money when they make a loan. New loans throughout the banking system generate new deposits elsewhere in the system. The money supply is usually increased by the act of lending, and reduced when loans are repaid faster than new ones are generated. In the United Kingdom between 1997 and 2007, there was a big increase in the money supply, largely caused by much more bank lending, which served to push up property prices and increase private debt. The amount of money in the economy as measured by M4 in the UK went from £750 billion to £1700 billion between 1997 and 2007, much of the increase caused by bank lending. If all the banks increase their lending together, then they can expect new deposits to return to them and the amount of money in the economy will increase. Excessive or risky lending can cause borrowers to default, the banks then become more cautious, so there is less lending and therefore less money so that the economy can go from boom to bust as happened in the UK and many other Western economies after 2007.

    Range of activities

    Activities undertaken by large banks include investment banking, corporate banking, private banking, insurance, consumer finance, foreign exchange trading, commodity trading, trading in equities, futures and options trading and money market trading.

    Channels

    Banks offer many different channels to access their banking and other services:

    Business model

    A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. The main method is via charging interest on the capital it lends out to customers. The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.

    This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance.

    In the past 20 years American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions.

    However, with convenience of easy credit, there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt. Banks make money from card products through interest charges and fees charged to cardholders, and transaction fees to retailers who accept the bank''s credit and/or debit cards for payments.

    This helps in making profit and facilitates economic development as a whole.

    ProductsA former building society, now a modern retail bank in Leeds, West Yorkshire.An interior of a branch of National Westminster Bank on Castle Street, LiverpoolBank of Georgia headquarters in Tbilisi, GeorgiaRetail banking Business (or commercial/investment) banking Capital and risk

    Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Bank capital is comprised principally of equity, retained earnings and subordinated debt.

    Some of the main risks faced by banks include:

    The capital requirement is a bank regulation, which sets a framework within which a bank or depository institution must manage its balance sheet. The categorization of assets and capital is highly standardized so that it can be risk weighted.

    Banks in the economySEB main building in Tallinn, EstoniaSee also: Financial system Economic functions

    The economic functions of banks include:

  • Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer''s order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash.
  • Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them.
  • Credit intermediation – banks borrow and lend back-to-back on their own account as middle men.
  • Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank''s assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position.
  • Asset liability mismatch/Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets).
  • Money creation – whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created.
  • Bank crisis

    Banks are susceptible to many forms of risk which have triggered occasional systemic crises. These include liquidity risk (where many depositors may request withdrawals in excess of available funds), credit risk (the chance that those who owe money to the bank will not repay it), and interest rate risk (the possibility that the bank will become unprofitable, if rising interest rates force it to pay relatively more on its deposits than it receives on its loans).

    Banking crises have developed many times throughout history, when one or more risks have emerged for a banking sector as a whole. Prominent examples include the bank run that occurred during the Great Depression, the U.S. Savings and Loan crisis in the 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the sub-prime mortgage crisis in the 2000s.

    Size of global banking industry

    Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to a record US$96.4 trillion while profits declined by 85% to US$115 billion. Growth in assets in adverse market conditions was largely a result of recapitalization. EU banks held the largest share of the total, 56% in 2008/2009, down from 61% in the previous year. Asian banks'' share increased from 12% to 14% during the year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment banking totaled US$66.3 billion in 2009, up 12% on the previous year.

    The United States has the most banks in the world in terms of institutions (7,085 at the end of 2008) and possibly branches (82,000). This is an indicator of the geography and regulatory structure of the USA, resulting in a large number of small to medium-sized institutions in its banking system. As of Nov 2009, China''s top 4 banks have in excess of 67,000 branches (ICBC:18000+, BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller banks with an undetermined number of branches. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy each had more than 30,000 branches—more than double the 15,000 branches in the UK.

    Regulation Main article: Banking regulation See also: Basel II

    Currently commercial banks are regulated in most jurisdictions by government entities and require a special bank license to operate.

    Usually the definition of the business of banking for the purposes of regulation is extended to include acceptance of deposits, even if they are not repayable to the customer''s order—although money lending, by itself, is generally not included in the definition.

    Unlike most other regulated industries, the regulator is typically also a participant in the market, being either a publicly or privately governed central bank. Central banks also typically have a monopoly on the business of issuing banknotes. However, in some countries this is not the case. In the UK, for example, the Financial Services Authority licenses banks, and some commercial banks (such as the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of England, the UK government''s central bank.

    Banking law is based on a contractual analysis of the relationship between the bank (defined above) and the customer—defined as any entity for which the bank agrees to conduct an account.

    The law implies rights and obligations into this relationship as follows:

  • The bank account balance is the financial position between the bank and the customer: when the account is in credit, the bank owes the balance to the customer; when the account is overdrawn, the customer owes the balance to the bank.
  • The bank agrees to pay the customer''s checks up to the amount standing to the credit of the customer''s account, plus any agreed overdraft limit.
  • The bank may not pay from the customer''s account without a mandate from the customer, e.g. a check drawn by the customer.
  • The bank agrees to promptly collect the checks deposited to the customer''s account as the customer''s agent, and to credit the proceeds to the customer''s account.
  • The bank has a right to combine the customer''s accounts, since each account is just an aspect of the same credit relationship.
  • The bank has a lien on checks deposited to the customer''s account, to the extent that the customer is indebted to the bank.
  • The bank must not disclose details of transactions through the customer''s account—unless the customer consents, there is a public duty to disclose, the bank''s interests require it, or the law demands it.
  • The bank must not close a customer''s account without reasonable notice, since checks are outstanding in the ordinary course of business for several days.
  • These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force within a particular jurisdiction may also modify the above terms and/or create new rights, obligations or limitations relevant to the bank-customer relationship.

    Some types of financial institution, such as building societies and credit unions, may be partly or wholly exempt from bank license requirements, and therefore regulated under separate rules.

    The requirements for the issue of a bank license vary between jurisdictions but typically include:

  • Minimum capital
  • Minimum capital ratio
  • ''Fit and Proper'' requirements for the bank''s controllers, owners, directors, or senior officers
  • Approval of the bank''s business plan as being sufficiently prudent and plausible.
  • Types of banks

    Banks'' activities can be divided into:

    Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit organizations.

    Types of retail banksNational Bank of the Republic, Salt Lake City 1908ATM Al-Rajhi BankNational Copper Bank, Salt Lake City 1911

    Types of investment banks Both combined Other types of banks Challenges within the banking industry
    The examples and perspective in this section may not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page. (September 2009)
    This section does not cite any references or sources. Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. (September 2008)
    United States Main article: Banking in the United States

    The United States banking industry is one of the most heavily regulated in the world, with multiple specialized and focused regulators. All banks with FDIC-insured deposits have the Federal Deposit Insurance Corporation (FDIC) as a regulator. However, for soundness examinations (i.e., whether a bank is operating in a sound manner), the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (OCC) is the primary federal regulator for national banks; and the Office of Thrift Supervision, or OTS, is the primary federal regulator for thrifts. State non-member banks are examined by the state agencies as well as the FDIC. National banks have one primary regulator—the OCC. Qualified Intermediaries & Exchange Accommodators are regulated by MAIC.

    Each regulatory agency has their own set of rules and regulations to which banks and thrifts must adhere.

    The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal inter-agency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions. Although the FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations are constantly changing.

    In addition to changing regulations, changes in the industry have led to consolidations within the Federal Reserve, FDIC, OTS, MAIC and OCC. Offices have been closed, supervisory regions have been merged, staff levels have been reduced and budgets have been cut. The remaining regulators face an increased burden with increased workload and more banks per regulator. While banks struggle to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate their banks. The impact of these changes is that banks are receiving less hands-on assessment by the regulators, less time spent with each institution, and the potential for more problems slipping through the cracks, potentially resulting in an overall increase in bank failures across the United States.

    The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their interest rate spread in the face of low rates on loans, rate competition for deposits and the general market changes, industry trends and economic fluctuations. It has been a challenge for banks to effectively set their growth strategies with the recent economic market. A rising interest rate environment may seem to help financial institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a return to their shareholders.

    The management of the banks’ asset portfolios also remains a challenge in today’s economic environment. Loans are a bank’s primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core. While always an issue for banks, declining asset quality has become a big problem for financial institutions. There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years of “good times.” The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in some cases depth of management. Problems are more likely to go undetected, resulting in a significant impact on the bank when they are discovered. In addition, banks, like any business, struggle to cut costs and have consequently eliminated certain expenses, such as adequate employee training programs.

    Banks also face a host of other challenges such as aging ownership groups. Across the country, many banks’ management teams and board of directors are aging. Banks also face ongoing pressure by shareholders, both public and private, to achieve earnings and growth projections. Regulators place added pressure on banks to manage the various categories of risk. Banking is also an extremely competitive industry. Competing in the financial services industry has become tougher with the entrance of such players as insurance agencies, credit unions, check cashing services, credit card companies, etc.

    As a reaction, banks have developed their activities in financial instruments, through financial market operations such as brokerage and MAIC trust & Securities Clearing services trading and become big players in such activities.

    Competition for loanable funds

    To be able to provide home buyers and builders with the funds needed, banks must compete for deposits. The phenomenon of disintermediation had to dollars moving from savings accounts and into direct market instruments such as U.S. Department of Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer deposits.

    To compete for deposits, US savings institutions offer many different types of plans:

    Accounting for bank accountsSuburban bank branch

    Bank statements are accounting records produced by banks under the various accounting standards of the world. Under GAAP and MAIC there are two kinds of accounts: debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses. The bank credits a credit account to increase its balance, and debits a credit account to decrease its balance.

    The customer debits his or her savings/bank (asset) account in his ledger when making a deposit (and the account is normally in debit), while the customer credits a credit card (liability) account in his ledger every time he spends money (and the account is normally in credit). When the customer reads his bank statement, the statement will show a credit to the account for deposits, and debits for withdrawals of funds. The customer with a positive balance will see this balance reflected as a credit balance on the bank statement. If the customer is overdrawn, he will have a negative balance, reflected as a debit balance on the bank statement.

    Brokered deposits

    One source of deposits for banks is brokers who deposit large sums of money on the behalf of investors through MAIC or other trust corporations. This money will generally go to the banks which offer the most favorable terms, often better than those offered local depositors. It is possible for a bank to engage in business with no local deposits at all, all funds being brokered deposits. Accepting a significant quantity of such deposits, or "hot money" as it is sometimes called, puts a bank in a difficult and sometimes risky position, as the funds must be lent or invested in a way that yields a return sufficient to pay the high interest being paid on the brokered deposits. This may result in risky decisions and even in eventual failure of the bank. Banks which failed during 2008 and 2009 in the United States during the global financial crisis had, on average, four times more brokered deposits as a percent of their deposits than the average bank. Such deposits, combined with risky real estate investments, factored into the savings and loan crisis of the 1980s. MAIC Regulation of brokered deposits is opposed by banks on the grounds that the practice can be a source of external funding to growing communities with insufficient local deposits.

    Globalization in the Banking Industry

    In modern time there has been huge reductions to the barriers of global competition in the banking industry. Increases in telecommunications and other financial technologies, such as Bloomberg, have allowed banks to extend their reach all over the world, since they no longer have to be near customers to manage both their finances and their risk. The growth in cross-border activities has also increased the demand for banks that can provide various services across borders to different nationalities. However, despite these reductions in barriers and growth in cross-border activities, the banking industry is nowhere near as globalized as some other industries. In the USA, for instance, very few banks even worry about the Riegle-Neal Act, which promotes more efficient interstate banking. In the vast majority of nations around globe the market share for foreign owned banks is currently less than a tenth of all market shares for banks in a particular nation. One reason the banking industry has not been fully globalized is that it is more convenient to have local banks provide loans to small business and individuals. On the other hand for large corporations, it is not as important in what nation the bank is in, since the corporation''s financial information is available around the globe. A Study of Bank Nationality and reach

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