Bank – definition and meaning

A bank is a financial institution that makes a profit by taking people’s deposits, paying interest on that money, and charging a higher rate of interest to borrowers who it lends money to. In some cases, such as with checking accounts (UK: current accounts), no interest is paid but the bank may charge a fee for the service.

Apart from central banks such as the US Federal Reserve System and the Bank of England, there are two main types of banks: commercial (retail) banks and investment (merchant) banks. In the UK, the term ‘high street banks’ refers to large retail banks.

The word bank comes from Middle French ‘banque’, which came from Old Italian ‘banca’, meaning ‘table’. In Old High German ‘bank’ or ‘bank’ meant ‘bench, counter’. In wealthy Renaissance Italian cities, benches were used as makeshift exchange counters or desks by bankers. They were covered with a green tablecloth.

Oldest bank in the world
Headquarters of the Monte Dei Paschi di Siena bank in Siena, Tuscany, Italy – the world’s oldest existing bank.

The English word ‘bank’, meaning a financial institution, is ‘banque’ in French, German – Bank, Spanish/Portuguese – banco, Italian – banca, Russian – банк, Japanese – 銀行, and Chinese – 银行.

Difference between commercial banks and investment banks

While commercial banks deal more with members of the general public as customers, investment banks focus on the needs of companies.

Commercial banks take deposits and lend money in the form of loans, while investment banks help companies obtain the required funds through the issue of securities. Commercial banks do not deal exclusively with private individuals, they may also have corporate clients.

Most large banks, such as Barclays, HSBC, and Deutsche Bank, are known as commercial banks because their main business is related to taking deposits and lending, but they also have considerable investment banking operations.

Famous investment banks, such as Morgan Stanley and Goldman Sachs, also take wholesale deposits and lend, but the bulk of their operations is securities related.

Since the2007/8 global financial crisis, the number of stand-alone investment banks has plummeted. Most have become parts of large commercial banks, while some such as Lehman Brothers have gone bust.

Commercial banks are generally more risk-averse than investment banks.

The Federal Reserve Bank of San Francisco says the following about commercial banks:

“Commercial banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient.”

Many bank services
Banks today offer many services to both individuals and companies.

Banks’ activities have broadened considerably over the past few hundred years. Today they include:

– commodity trading

– consumer finance

– corporate banking

– foreign exchange trading

– futures and options trading

– insurance

– investment banking

money market trading

– personal banking

– private banking

– trading in equities

Banks are closely regulated

Banks have a huge impact on a country’s financial system and overall economy, hence they are highly regulated by most nations’ governments or central banks.

Regulations are designed to limit banks’ exposures to liquidity risks, overall solvency risk, and the dangers of the credit market. Since the global financial crisis, banks in most countries are required to hold more and higher-quality equity.

Giant multinational banks are today required to hold even more capital, because of their potential impact on the world’s financial system economy if they fail.

Banks have been around for a very long time

Modern-type banks started emerging in 14th century Europe, specifically in the wealthy cities of Renaissance Italy. In many ways they were a continuation of the concepts and ideas of lending and credit that had their roots in the ancient world.

The world’s oldest operating retail bank is Italy’s Monte dei Paschi di Siena, which was founded in 1472 by the magistrate of the city state of Siena.

Hamburg-based Berenberg Bank, which was founded by the Belgian-origined Berenberg family in 1590, is the oldest existing merchant bank.

The oldest bank in the US was the Bank of New York, which was founded in 1784 by Alexander Hamilton, a founding father of the United States. It opened for business at Walton House, Lower Manhattan, just a few months after British troops had departed from American soil. In 2007, it merged with Mellon Financial Corporation, and continues today under the name of The Bank of New York Mellon (BNY Mellon).

The oldest bank in the United Kingdom that still exists today is C. Hoare & Co. – it currently stands as the world’s fourth oldest bank. It was founded by Sir Richard Hoare in 1672. The bank remains family owned and is today managed by the 11th generation of Sir Richard’s direct descendants.

Canada’s oldest bank is the Bank of Montreal (French: Banque de Montréal), commonly known as BMO. It was founded by John Richardson and eight merchants in 1817, and is today the fourth-largest bank in the country by market capitalization (among the top 10 in North America).

Westpac Banking corporation is Australia’s first and oldest bank. It was established in 1817 as the Bank of New South Wales, with Edward Smith Hall as its first cashier and secretary. After acquiring the Commercial Bank of Australia in 1982, it changed its name to Westpac Banking Corporation. Today, it is one of Australia’s ‘Big Four’ banks.

According to Jeanne Gobat, a Senior Economist in the IMF’s Monetary and Capital Markets Department, banks are:

“Institutions that match up savers and borrowers help ensure that economies function smoothly.”

In the United States, a bankers’ bank is an institution that provides banking services to community banks. It belongs to a group of community banks and aims to level the competitive field, i.e. help community banks compete against the large banks.

Video – What is a bank?