The Rockefeller-MorganFamily Tree (1904), which depicts how the largest trusts at the turn of the 20th century were in turn connected to each other
A trust or corporate trust is a large grouping of business interests with significant market power, which may be embodied as a corporation or as a group of corporations that cooperate with one another in various ways. These ways can include constituting a trade association, owning participating interests in one another, constituting a corporate group (sometimes specifically a conglomerate), or combinations thereof. The term trust is often used in a historical sense to refer to monopolies or near-monopolies in the United States during the Second Industrial Revolution
in the 19th century and early 20th century. The use of corporate trusts
during this period is the historical reason for the name "antitrust law".
In the broader sense of the term, relating to trust law, a trust is a legal arrangement based on principles developed and recognised over centuries in English law, specifically in equity,
by which one party conveys legal possession and title of certain
property to a second party, called a trustee. The trustee holds the
property, while any benefit from the property accrues to another person,
the beneficiary. Trusts are commonly used to hold inheritances for the
benefit of children and other family members, for example. In business,
such trusts, with corporate entities as the trustees, have sometimes
been used to combine several large businesses in order to exert complete
control over a market, which is how the narrower sense of the term grew out of the broader sense.
In the United States, the use of corporate trusts died out in the
early 20th century as U.S. states passed laws making it easier to
create new corporations.
History
The OED (Oxford English Dictionary) dates use of the word trust in a business organization sense from 1825.
The business or "corporate" trust came into use in the 19th-century United States, during the Gilded Age, as a legal device to consolidate industrial activity across state lines. In 1882 John D. Rockefeller and other owners of Standard Oil
faced several obstacles to managing and profiting from their large oil
refining business. The existing approach of separately owning and
dealing with several companies in each state was unwieldy, often
resulting in turf battles and non-uniform practices. Furthermore, the
Pennsylvania legislature proposed to tax out-of-state corporations on
their entire business activity. Concerned that other states could
follow, Standard Oil had its attorney Samuel C. T. Dodd adapt the common law instrument of a trust to avoid cross-state taxation and to impose a single management hierarchy. The Standard Oil Trust was formed pursuant to a trust agreement in which the individual shareholders of many separate corporations
agreed to convey their shares to the trust; it ended up entirely owning
14 corporations and also exercised majority control over 26 others. Nine individuals held trust certificates and acted as the trust's board of trustees. One of those trustees, Rockefeller himself, held 41% of the trust
certificates; the next most powerful trustee held about 13%. This trust
became a model for other industries.
An 1888 article explained the difference between trusts in the traditional sense and the new corporate trusts:
A trust is ... simply the case of
one person holding the title of property, whether land or chattels, for
the benefit of another, termed a beneficiary. Nothing can be more common
or more useful. But the word is now loosely applied to a certain class
of commercial agreements and, by reason of a popular and unreasoning
dread of their effect, the term itself has become contaminated. This is
unfortunate, for it is difficult to find a substitute for it. There
may, of course, be illegal trusts; but a trust in and by itself is not
illegal: when resorted to for a proper purpose, it has been for
centuries enforced by courts of justice, and is, in fact, the creature
of a court of equity.
Although such corporate trusts were initially set up to improve the
organization of large businesses, they soon faced widespread accusations
of abusing their market power to engage in anticompetitive business practices (in order to establish and maintain monopolies). Such accusations caused the term trust to become strongly associated with such practices among the American public and led to the enactment in 1890 of the Sherman Antitrust Act, the first U.S. federal competition statute.
Octopus representing Standard Oil with arms wrapped around U.S. Congress and steel, copper, and shipping industries, and reaching for the White House
Meanwhile, trust agreements, the legal instruments used to create the corporate trusts, received a hostile reception in state courts during the 1880s and were quickly phased out in the 1890s in favor of other devices like holding companies for maintaining centralized corporate control. For example, the Standard Oil Trust terminated its own trust agreement in March 1892. Regardless, the name stuck, and American competition laws are known
today as antitrust laws as a result of the historical public aversion to
trusts, while other countries use the term competition laws instead.
Monopoly pricing had also become a contentious issue, with several states passing Granger Laws to regulate railroad and grain elevator prices to protect farmers. The Interstate Commerce Act of 1887 created the Interstate Commerce Commission for similar purposes, federalizing the movement against anti-competitive business practices.
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Banks play an important role in financial stability and the economy of a country, so most countries exercise a high degree of regulation over banks. Most countries have institutionalized 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, the Basel Accords.
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. Nonbanks
that provide payment services such as remittance companies are normally
not considered as an adequate substitute for a bank account.
Banks issue new money when they make loans. In contemporary
banking systems, regulators set a minimum level of reserve funds that
banks must hold against the deposit liabilities created by the funding
of these loans, in order to ensure that the banks can meet demands for
payment of such deposits. These reserves can be acquired through the
acceptance of new deposits, sale of other assets, or borrowing from
other banks including the central bank.
Video banking
performs banking transactions or professional banking consultations via
a remote video and audio connection. Video banking can be performed via
purpose built banking transaction machines (similar to an Automated
teller machine) or via a video conference enabled bank branch clarification
Relationship manager, mostly for private banking or business banking, who visits customers at their homes or businesses
Direct Selling Agent, who works for the bank based on a contract, whose main job is to increase the customer base for the bank
Business models
Banks generate revenue in a variety of different ways including
interest, transaction fees and financial advice. Traditionally, the most
significant 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.
First, this includes the Gramm–Leach–Bliley Act,
which allows banks again to merge with investment and insurance houses.
Merging banking, investment, and insurance functions allows traditional
banks to respond to increasing consumer demands for "one-stop shopping"
by enabling cross-selling of products (which, the banks hope, will also increase profitability).
Second, they have expanded the use of risk-based pricing
from business lending to consumer lending, which means charging higher
interest rates to those customers that are considered to be a higher
credit risk and thus increased chance of default
on loans. This helps to offset the losses from bad loans, lowers the
price of loans to those who have better credit histories, and offers
credit products to high risk customers who would otherwise be denied
credit.
Third, they have sought to increase the methods of payment
processing available to the general public and business clients. These
products include debit cards, prepaid cards, smart cards, and credit cards. They make it easier for consumers to conveniently make transactions and smooth their consumption
over time (in some countries with underdeveloped financial systems, it
is still common to deal strictly in cash, including carrying suitcases
filled with cash to purchase a home).
However, with the convenience of easy credit, there is also an
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 credit and debit card
holders, and transaction fees to retailers who accept the bank's cards for payments.
This helps in making a profit and facilitates economic development as a whole.
Recently, as banks have been faced with pressure from fintechs,
new and additional business models have been suggested such as freemium,
monetization of data, white-labeling of banking and payment
applications, or the cross-selling of complementary products.
This 15th-century painting depicts money-dealers at a banca (bench) during the Cleansing of the Temple.
Banking as an archaic activity (or quasi-banking) is thought to have begun as early as the end of the 4th millennium BCE, to the 3rd millennia BCE.
Medieval
In Europe, the first recorded instances of private banks were run by the Knights Templar.
The Knights provided safe passage for pilgrims traveling to Jerusalem.
To avoid being targeted by robbers because of the large sum of money required for the pilgrimage, pilgrims would exchange money in Templar strongholds for a receipt. They could then withdraw the money along the route at other Templar strongholds to purchase necessities. The organization would provide these services from the 12th century until their disbandment in the early 14th century. The present era of banking can be traced to wealthy medieval Renaissance Italian city-states, whose elite families such as the Bardi and Peruzzi dominated banking in 14th-century Florence before establishing branches in many other parts of Europe. Giovanni di Bicci de' Medici set up one of the most famous Italian banks, the Medici Bank, in 1397. The Consell de Cent founded the earliest-known state deposit bank, the Taula de canvi de Barcelona (Table of Change), in 1401 at Barcelona. This was followed by The Bank of Saint George, created in 1407 at Genoa, Italy.
Sealing of the Bank of England Charter (1694), by Lady Jane Lindsay, 1905.
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 who 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.
Gradually the goldsmiths began to lend money out on behalf of the depositor, and promissory notes,
which evolved into banknotes, were issued for money deposited as a loan
to the goldsmith. By the 19th century, ordinary deposits of money in
banks had become a mere loan, or mutuum, and the bank restored an equivalent sum whenever it was demanded Money, when paid into a bank, ceases altogether to be the money of the
principal (see Parker v. Marchant, 1 Phillips 360); it is then the money
of the banker, who is bound to return an equivalent, by paying a
similar sum to that deposited with him, when he is asked for it.
The goldsmith paid interest on 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.
During the 20th century, developments in telecommunications and
computing caused major changes to banks' operations and let banks
dramatically increase in size and geographic spread. The 2008 financial crisis led to bank failures, including some of the world's largest banks, and provoked debate about bank regulation.
Etymology
The word bank was taken into Middle English from Middle Frenchbanque, from Old Italianbanco, meaning "table", from Old High Germanbanc, bank "bench, counter". Benches were used as makeshift desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.
Definition
The definition of a bank varies from country to country. See the relevant country pages for more information.
Under English common law, a banker is defined as a person who carries on the business of banking by conducting current accounts for their customers, paying checks drawn on them as well as collecting them for their customers.
In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including checks, 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 checks does not
depend on how the bank is structured or regulated.
The business of banking is in many 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:
"banking business" means the business of receiving money on
current or deposit account, paying and collecting checks drawn by or
paid in by customers, the making of advances to customers, and includes
such other business as the Authority may prescribe for the purposes of
this Act; (Banking Act (Singapore), Section 2, Interpretation).
"banking business" means the business of either or both of the following:
receiving from the general public money on current, deposit,
savings or other similar account repayable on demand or within less than
[3 months] ... 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 check has lost its primacy in most banking systems as a payment
instrument. This has led legal theorists to suggest that the check 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 .
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 consists principally of equity, retained earnings and subordinated debt.
Some of the main risks faced by banks include:
Credit risk: risk of loss arising from a borrower who does not make payments as promised.
Liquidity risk:
risk that a given security or asset cannot be traded quickly enough in
the market to prevent a loss (or make the required profit).
Market risk:
risk that the value of a portfolio, either an investment portfolio or a
trading portfolio, will decrease due to the change in value of the
market risk factors.
Operational risk: risk arising from the execution of a company's business functions.
Reputational risk: a type of risk related to the trustworthiness of the business.
Macroeconomic risk: risks related to the aggregate economy the bank is operating in.
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.
After the 2008 financial crisis, regulators force banks to issue Contingent convertible bonds (CoCos). These are hybrid capital securities that absorb losses in accordance with their contractual terms
when the capital of the issuing bank falls below a certain level. Then
debt is reduced and bank capitalization gets a boost. Owing to their
capacity to absorb losses, CoCos have the potential to satisfy
regulatory capital requirement.
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 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/destruction – whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created and conversely, whenever the principal on that loan is repaid money is destroyed.
Banks are susceptible to many forms of risk which have triggered occasional systemic crises. These include liquidity risk (where many depositors 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).
Bank crises have developed many times throughout history when one
or more risks have emerged for the 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.
The 2023 global banking crisis is the latest of these crises: In March 2023, liquidity shortages and bank insolvencies led to three bank failures in the United States, and within two weeks, several of the world's largest banks failed or were shut down by regulators.
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 in 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 (5,330 as of 2015) and possibly branches (81,607 as of
2015). This is an indicator of the geography and regulatory structure of the
US, resulting in a large number of small to medium-sized institutions in
its banking system.
As of November 2009, China's top four banks have over 67,000 branches (ICBC:18000+, BOC:12000+, CCB:13000+, ABC:24000+)
with 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 United Kingdom.
Mergers and acquisitions
Between 1985 and 2018 banks engaged in around 28,798 mergers or
acquisitions, either as the acquirer or the target company. The overall
known value of these deals accumulates to around 5,169 bil. USD. In terms of value, there have been two major waves (1999 and 2007)
which both peaked at around 460 bil. USD followed by a steep decline
(−82% from 2007 until 2018).
Here is a list of the largest deals in history in terms of value with participation from at least one bank:
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 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 Prudential Regulation 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.
And, 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 debank a customer without reasonable notice as regulation demands.
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 or
create new rights, obligations, or limitations relevant to the
bank-customer relationship.
Some types of financial institutions, 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.
Different types of banking
An illustration of Northern National Bank as advertized in a 1921 book highlighting the opportunities available in Toledo, Ohio
Banks' activities can be divided into:
retail banking, dealing directly with individuals and small businesses;
Commercial banks: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market
activities. Since the two no longer have to be under separate
ownership, some use the term "commercial bank" to refer to a bank or a
division of a bank that mostly deals with deposits and loans from
corporations or large businesses.
Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and partners.
Community development banks: regulated banks that provide financial services and credit to under-served markets or populations.
Land development banks: The special banks providing long-term loans are called land development banks (LDB). The history of LDB is quite old. The first LDB was started at Jhang in Punjab
in 1920. The main objective of the LDBs is to promote the development
of land, agriculture and increase the agricultural production. The LDBs
provide long-term finance to members directly through their branches.
Credit unions or co-operative banks: not-for-profit cooperatives
owned by the depositors and often offering rates more favorable than
for-profit banks. Typically, membership is restricted to employees of a
particular company, residents of a defined area, members of a certain union or religious organizations, and their immediate families.
Private banks:
banks that manage the assets of high-net-worth individuals.
Historically a minimum of US$1 million was required to open an account,
however, over the last years, many private banks have lowered their
entry hurdles to US$350,000 for private investors.
Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.
Savings banks:
in Europe, savings banks took their roots in the 19th or sometimes even
in the 18th century. Their original objective was to provide easily
accessible savings products to all strata of the population. In some
countries, savings banks were created on public initiative; in others,
socially committed individuals created foundations to put in place the
necessary infrastructure. Nowadays, European savings banks have kept
their focus on retail banking: payments, savings products, credits, and
insurances for individuals or small and medium-sized enterprises. Apart
from this retail focus, they also differ from commercial banks by their
broadly decentralized distribution network, providing local and regional
outreach – and by their socially responsible approach to business and
society.
Ethical banks:
banks that prioritize the transparency of all operations and make only
what they consider to be socially responsible investments.
Merchant banks were traditionally banks which engaged in trade finance.
The modern definition, however, refers to banks which provide capital
to firms in the form of shares rather than loans. Unlike venture caps, they tend not to invest in new companies.
Universal banks, more commonly known as financial services
companies, engage in several of these activities. These big banks are
very diversified groups that, among other services, also distribute
insurance – hence the term bancassurance, a portmanteau word
combining "banque or bank" and "assurance", signifying that both
banking and insurance are provided by the same corporate entity.
Other types of banks
Central banks
are normally government-owned and charged with quasi-regulatory
responsibilities, such as supervising commercial banks, or controlling
the cash interest rate. They generally provide liquidity to the banking system and act as the lender of last resort in event of a crisis.
Islamic banks adhere to the concepts of Islamic law.
This form of banking revolves around several well-established
principles based on Islamic laws. All banking activities must avoid
interest, a concept that is forbidden in Islam. Instead, the bank earns
profit (markup) and fees on the financing facilities that it extends to customers.
The United States banking industry is one of the most heavily regulated and guarded 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. State
non-member banks are examined by the state agencies as well as the FDIC. National banks have one primary regulator – the OCC.
Each regulatory agency has its 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, 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 an 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
boards of directors are aging. Banks also face ongoing pressure from
shareholders, both public and private, to achieve earnings and growth
projections. Regulators place added pressure on banks to manage the
various categories of risk. Another major challenge is the aging
infrastructure, also called legacy IT. Backend systems were built
decades ago and are incompatible with new applications. Fixing bugs and
creating interfaces costs huge sums, as knowledgeable programmers become
scarce.
Competition
Competition between banks varies by country and can range from a competitive market to oligopoly. Competitiveness of the banking market can be estimated with the Lerner index and Boone indicator. Higher competition between banks tends to increase interest rates on savings accounts and reduces mortgage rates.
Loan activities of banks
The phenomenon of disintermediation had to dollars moving from savings accounts 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.
Banking institutions offer many different types of plans:
Passbook or ordinary deposit accounts – permit any amount to be added to or withdrawn from the account at any time.
NOW and Super NOW accounts - function like checking accounts but
earn interest. A minimum balance may be required on Super NOW accounts.
Money market accounts - carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance.
Certificate accounts – subject to loss of some or all interest on withdrawals before maturity.
Notice accounts – the equivalent of certificate accounts with an
indefinite term. Savers agree to notify the institution a specified time
before withdrawal.
Individual retirement accounts (IRAs) and Keogh plans
– a form of retirement savings in which the funds deposited and
interest earned are exempt from income tax until after withdrawal.
Checking accounts – offered by some institutions under definite restrictions.
All withdrawals and deposits are completely the sole decision and
responsibility of the account owner unless the parent or guardian is
required to do otherwise for legal reasons.
Club accounts and other savings accounts – designed to help people save regularly to meet certain goals.
Bank statements are accounting records produced by banks under the various accounting standards of the world. Under GAAP
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) 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 deposit brokers who
deposit large sums of money on behalf of investors through 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 that failed in the United States
during the 2008 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. 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. There are different types of accounts: saving, recurring and current accounts.
Custodial accounts
Custodial accounts are accounts in which assets are held for a third
party. For example, businesses that accept custody of funds for clients
prior to their conversion, return, or transfer may have a custodial
account at a bank for these purposes.
In modern times there have 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. 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 US, 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 the
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 businesses 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.
There have been two significant attempts to overcome the
industry's traditional focus on competing at the national level rather
than the international level. In the 1980s, Citigroup and HSBC
both began to develop large networks of retail bank branches in
numerous countries around the world, in order to become global consumer
banking brands. But in 2021, Citigroup initiated an exit from retail
banking outside of its core U.S. market, while in 2022, HSBC initiated an exit from the U.S. retail market (except for its wealth management business) and then in 2023 put its retail operations in a dozen other countries under review for sale or closure. According to Wells Fargo,
both banks were operating on the assumption that globalization would
lead to the rise of large numbers of consumers who would regularly
travel across borders for both work and play, but that "global consumer
customer never materialized".
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