A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers that have capital deficits to customers with capital surplusesSony VPCEH3T9E battery.
Due to their critical status within the financial system and the economy[citation needed] generally, banks are highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profitSony VPCEH3N6E battery. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords.
The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.[1]
History
Main article: History of banking
Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Sony VPCEH3N1E battery Perhaps the most famous Italian bank was the Medici bank, set up by Giovanni Medici in 1397.[3] The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy.[4]
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. Sony VPCEH3D0E battery
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 and a bankSony VPCEH3B1E battery.
Another possible origin of the word is from the Sanskrit words (ब्यय) 'byaya' (expense) and 'onka' (calculation) = byaya-onka. This word still survives in Bangla, which is one of the Sanskrit's child languages. ব্যায় + অঙ্ক = ব্যাঙ্ক . Such expense calculations were the biggest part of mathmetical treaties written by Indian mathmeticians as early as 500 B.CSony VPCEH2Z1E battery.
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:[6]
conducting current accounts for his customers
paying cheques drawn on him, and
collecting cheques for his customers.
Banco de Venezuela in Coro.
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 personsSony VPCEH2S9E battery, 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 organized or regulated.
The business of banking is in many English common law countries not defined by statute but by common law, the definition aboveSony VPCEH2Q1E battery. 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 purposes of entry regulating and supervising banks rather than regulating the actual business of bankingSony VPCEH2P0E battery. 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 cheques 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) Sony VPCEH2N1E battery.
"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[7]
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 instrumentSony VPCEH2M9E battery. 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.[8]
Banking
Standard activities
Large door to an old bank vault.
Banks act as payment agents by conducting checking or current accounts for customers, paying checks drawn by customers on the bank, and collecting checks deposited to customers' current accountsSony VPCEH2M1E battery. 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 lendingSony VPCEH2L9E battery.
Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank accountSony VPCEH2J1E battery.
Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings too. Sony VPCEH2H1E battery
Channels
Banks offer many different channels to access their banking and other services:
Automated Teller Machines
A branch is a retail location
Call center
Mail: most banks accept cheque deposits via mail and use mail to communicate to their customers, e.g. by sending out statements
Mobile banking is a method of using one's mobile phone to conduct banking transactions
Online banking is a term used for performing transactions, payments etc. over the Internet
Relationship Managers, mostly for private banking or business banking, often visiting customers at their homes or businessesSony VPCEH2F1E battery
Telephone banking is a service which allows its customers to perform transactions over the telephone with automated attendant or when requested with telephone operator
Video banking is a term used for performing 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.clarificationSony VPCEH2E0E battery
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[citation needed]. 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 activitiesSony VPCEH2D0E battery.
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 performanceSony VPCEH2C0E battery.
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 bankingSony VPCEH1Z1E battery, 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 loansSony VPCEH1S9E battery. 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 cardsSony VPCEH1S8E battery. 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 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 payments and fees charged to consumers and transaction fees to companies that accept the creditSony VPCEH1S1E battery- debit - cards. This helps in making profit and facilitates economic development as a whole.[9]
Risk and capital
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. Some of the main risks faced by banks include:
Credit risk: risk of loss[citation needed] arising from a borrower who does not make payments as promisedSony VPCEH1S0E battery.
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 execution of a company's business functions.
Reputational risk: a type of risk related to the trustworthiness of business.
Macroeconomic risk: risks related to the aggregate economy the bank is operating inSony VPCEH1M9E battery.[10]
The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted (see risk-weighted asset).
Banks in the economy
See 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 orderSony VPCEH1M1E battery. 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 instrumentsSony VPCEH1L9E battery. 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 menSony VPCEH1L8E battery.
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 unsecuredSony VPCEH1L0E battery; 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.
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 Sony VPCEH1J8E battery (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 createdSony VPCEH1J1E battery.
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) Sony VPCEH1E1E battery.
Banking crises have developed many times throughout history, when one or more risks have materialized 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 2000sSony VPCEH1AJ battery.
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 $96.4 trillion while profits declined by 85% to $115bn. 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 yearSony VPCCA3S1E battery. 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 $66.3bn in 2009, up 12% on the previous year.[11]
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).[citation needed] This is an indicator of the geography and regulatory structure of the USASony VPCCA3E1E battery, 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 UKSony VPCCA2Z0E battery.
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 definitionSony VPCCA2S1E battery.
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) Sony VPCCA2S0E battery 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 bankSony VPCCA2AJ battery.
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 accountSony VPCCA1S1E/W battery.
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 itSony VPCCA1S1E/P battery.
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 relationshipSony VPCCA1S1E/G battery.
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 capitalSony VPCCA1S1E/D battery
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 retail banking, dealing directly with individuals and small businesses; business banking, providing services to mid-market business; corporate banking, directed at large business entitiesSony VPCCA1S1E/B battery; private banking, providing wealth management services to high net worth individuals and families; and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit organizations.
Types of retail banks
National Bank of the Republic, Salt Lake City 1908
ATM Al-Rajhi Bank
National Copper Bank, Salt Lake City 1911
Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After the Great DepressionSony VPCCA1S1E battery, 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 businessesSony VPCCA1C5E battery.
Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners.
Community development banks: regulated banks that provide financial services and credit to under-served markets or populations.
Credit unions: 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 neighborhood, members of a certain labor union or religious organizations, and their immediate familiesSony VPCCA1AHJ battery.
Postal savings banks: savings banks associated with national postal systems.
Private banks: banks that manage the assets of high net worth individuals. Historically a minimum of USD 1 million was required to open an account, however, over the last years many private banks have lowered their entry hurdles to USD 250,000 for private investors. Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banksSony VPCCA1AGJ battery.
Savings bank: 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 infrastructureSony VPCCA1AFJ battery. 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 societySony VAIO VPCF11Z1E battery.
Building societies and Landesbanks: institutions that conduct retail banking.
Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially-responsible investments.
A Direct or Internet-Only bank is a banking operation without any physical bank branches, conceived and implemented wholly with networked computersSony VAIO VPCF11S1E battery.
Types of investment banks
Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital market activities such as mergers and acquisitions.
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 capital firms, they tend not to invest in new companiesSony VAIO VPCF11M1E/H battery.
Both combined
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 entitySony VAIO VPCF11M1E battery.
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 crisisSony VAIO VPCF119FJ battery.
Islamic banks adhere to the concepts of Islamic law. This form of banking revolves around several well-established principles based on Islamic canons. 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 customersSony VAIO VGN-CS33H battery.
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 unreferenced section requires citations to ensure verifiability.
United States
Main article: Banking in the United States
In the United States, the banking industry is a highly regulated industry with detailed and focused regulators. All banks with FDIC-insured deposits have the Federal Deposit Insurance Corporation (FDIC) as a regulator; however, for examinations, Sony VAIO VGN-CS33H/Z battery 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 OCCSony VAIO VGN-CS33H/B battery. 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 changingSony VAIO VGN-CS31Z/Q battery.
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 regulatorSony VAIO VGN-CS31S/W battery. 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 StatesSony VAIO VGN-CS31S/V battery.
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 marketSony VAIO VGN-CS31S/T battery. 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 suspectSony VAIO VGN-CS31S/R battery, 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 undetectedSony VAIO VGN-CS31S/P battery, resulting in a significant impact on the bank when they are recognized. 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 agingSony VAIO VGN-CS28 battery. 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, etcSony VAIO VGN-CS28/Q battery.
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. Treasury obligationsSony VAIO VGN-CS27 battery, 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.[12]
To compete for deposits, US savings institutions offer many different types of plans:[12]
Passbook or ordinary deposit accounts — permit any amount to be added to or withdrawn from the account at any timeSony VAIO VGN-CS27/W battery.
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 withdrawalSony VAIO VGN-CS27/R battery.
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 reasonsSony VAIO VGN-CS27/P battery.
Club accounts and other savings accounts — designed to help people save regularly to meet certain goals.
Accounting for bank accounts
Suburban 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. This means you credit a credit account to increase its balance, and you debit a credit account to decrease its balanceSony VAIO VGN-CS27/C battery.[13]
This also means you credit your savings account every time you deposit money into it (and the account is normally in credit), while you debit your credit card account every time you spend money from it (and the account is normally in debit). However, if you read your bank statement, it will say the opposite—that you credit your account when you deposit moneySony VAIO VGN-CS26T/W battery, and you debit it when you withdraw funds. If you have cash in your account, you have a positive (or credit) balance; if you are overdrawn, you have a negative (or deficit) balance.
Where bank transactions, balances, credits and debits are discussed below, they are done so from the viewpoint of the account holder—which is traditionally what most people are used to seeing.
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 termsSony VAIO VGN-CS26T/V battery, 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 depositsSony VAIO VGN-CS26T/T battery. 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 1980sSony VAIO VGN-CS26T/R battery. 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.[14]
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 riskSony VAIO VGN-CS26T/Q battery. 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 ActSony VAIO VGN-CS26T/P battery, 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 individualsSony VAIO VGN-CS26T/C battery. 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 pawnbroker is an individual or business (pawnshop or pawn shop) that offers secured loans to people, with items of personal property used as collateral. The word pawn is derived from the Latin pignus, for pledge, and the items having been pawned to the broker are themselves called pledges or pawns, or simply the collateralSony VAIO VGN-CS25H battery.
If an item is pawned for a loan, within a certain contractual period of time the pawner may purchase it back for the amount of the loan plus some agreed-upon amount for interest. The amount of time, and rate of interest, is governed by law or by the pawnbroker's policies. If the loan is not paid (or extended, if applicable) within the time periodSony VAIO VGN-CS25H/W battery, the pawned item will be offered for sale by the pawnbroker. Unlike other lenders, the pawnbroker does not report the defaulted loan on the customer's credit report, since the pawnbroker has physical possession of the item and may recoup the loan value through outright sale of the item. The pawnbroker also sells items that have been sold outright to them by customersSony VAIO VGN-CS25H/R battery.
Business model
Assessment of items
The pawning process begins when a customer brings an item into a pawn shop. Common items pawned (or, in some instances, sold outright) by customers include jewelry, electronics, musical instruments, and tools (both hand tools and power tools). In some of the United States, pawnshops with firearms licenses sell pistols and rifles to customers who meet state and federal acquisition criteria. In other states and other countriesSony VAIO VGN-CS25H/Q battery, though, such as Canada and the UK, pawnshops do not sell firearms. Gold, silver, and platinum are popular items which are often purchased; even if the source (such as a piece of broken jewelry) has little value, the metals can still be sold in bulk to a bullion dealer or smelter for the value of the gold, silver, or platinum content. Similarly, with jewelry that contains genuine gemstones, even if the jewelry is broken or missing piecesSony VAIO VGN-CS25H/P battery, the jewels may have value in their own right because they can be reset into a new item of jewelry.
The pawnbroker assumes the risk that an item might be stolen property; however, laws exist in many jurisdictions that protect both the community at large and the brokers from unknowingly engaging in criminal activity (handling stolen goods, also known as "fencing"). These laws often require the pawnbroker to establish positive identification of the seller through photo identification (such as a driver's license or government-issued identity document) Sony VAIO VGN-CS25H/C battery, as well as a holding period placed on an item purchased by a pawnbroker (to allow for local law enforcement authorities to track down stolen items). In some jurisdictions, pawnshops must give a list of all newly pawned items and any associated serial number to police, to allow the police to determine if any of the items have been reported as stolenSony VAIO VGN-CS23T/W battery. Many police departments will advise burglary or robbery victims to visit local pawnshops to see if they can locate stolen items which might have been pawned or sold to the pawnbroker. Some pawnshops set up their own screening criteria to avoid buying stolen property.
The pawnbroker assesses an item for its condition and marketability by testing the item (in the case of electronics or instruments) and examining it for flaws, scratches or other damageSony VAIO VGN-CS23T/Q battery. Another aspect that affects marketability is the supply and demand for the item in the community or region. In some markets, the used goods market is so flooded with used stereos and car stereos, for example, that pawnshops will only accept the higher-quality brand names. Alternatively, a customer may offer to pawn an item which will be difficult to sell, such as a surfboard in an inland region or a pair of snowshoes in tropical or sub-tropical regionsSony VAIO VGN-CS23H battery. The pawnshop owner will either turn down hard-to-sell items or offer a very low amount of money for these items. While some items will never get outdated, such as hammers and hand saws, electronics and computer items can quickly get out of date and become unsalable. As such, pawnshop owners have to learn about the different makes and models of computers, software and other electronic equipmentSony VAIO VGN-CS23H/S battery, so that they can discern between items which are still salable, and those which are obsolete.
To assess the value of different items, pawnbrokers use guidebooks ("Blue Books"), catalogs, Internet search engines, and their own experience to subjectively evaluate the goods. Some pawnbrokers have training in the identification of gems, or they employ a specialist with gem training to assess jewelrySony VAIO VGN-CS23H/B battery. One of the risks when accepting secondhand goods is that the item may be counterfeit. If the item is counterfeit, such as a fake Rolex watch, it may have only a fraction of the value of the genuine item. Once the pawnbroker has determined that the item is genuine and not likely to have been stolen, and that it is marketable, the pawnbroker offers the customer an amount for it. The customer can either sell the item outright if (as in most cases) the pawnbroker is also a licensed secondhand dealer, or offer the item as collateralSony VAIO VGN-CS23G battery.
Determining amount of loan
To determine the amount of the loan, the pawnshop owner needs to take into account several factors. One factor is the predicted resale value of the item. This is often thought of in terms of a range, with the low point being the wholesale value of the used good, in the case that the pawnshop is unable to sell it, and they decide to sell it to a wholesale merchant of used goodsSony VAIO VGN-CS23G/W battery. The higher point in the range is the retail sale price in the pawnshop. For example, a five-year-old 42" Sony TV may have been bought by the customer for $1000. However, as a used item in a pawnshop, it will only fetch $250 and $300, because the customers will be wary that it might be a "lemon" that the seller is getting rid of because it has some hard-to-detect problemSony VAIO VGN-CS23G/Q battery. Used electronics wholesalers will buy the TV for $100 to $150. The wholesaler pays a lower price than the retail value because they have the added cost of hiring electronics technicians who overhaul and repair the items so that they can be sold in used electronics stores.
The pawnshop owner takes into account their knowledge of supply and demand for the item in question to determine if they think that they will end up selling the TV for $100 to a wholesaler or $300 to a pawnshop customerSony VAIO VGN-CS23G/P battery. If the pawnshop owner believes that there are "too many used TVs around these days in town", they may fear that they will only get $100 for the TV if they have to unload it to a wholesaler. With that figure in mind as the expected revenue, the pawnshop owner has to factor in the overhead costs of the store (rent, heat, electricity, phone connection, yellow pages ad, website costsSony VAIO VGN-CS21Z/Q battery, staff costs, insurance, alarm system, etc.), and a profit for the business. As such, the customer who comes in with this TV that they paid $1000 for when it was new may be offered as little as $50 by the pawnshop owner, who is taking into account all of the risk and cost factors.
In determining the amount of the loan, the pawnshop owner also assesses the likelihood that the customer will pay the interest for several weeks or months and then return to repay the loan and reclaim the itemSony VAIO VGN-CS21S/W battery. Since the key to the pawnshop business model is making interest off the loaned money, pawnshop owners want to accept items that the customer is likely to want to recover, after having paid interest for a period on the loan. If, in an extreme case, a pawnshop only accepted items that customers had no interest in ever reclaiming, it would not make any money from interest, and the store would in effect become a second hand dealerSony VAIO VGN-CS21S/V battery.
Determining if the customer is likely to return to reclaim an item is a subjective decision, and wily customers may attempt to persuade the pawnshop owner that the item in question is important to them ("that necklace belonged to my grandmother, so I will certainly return for it"), and they will claim that they will return to recover itSony VAIO VGN-CS21S/T battery. The pawnshop owner can use a variety of factors to evaluate the likelihood that the customer will return, such as whether the customer lives in the neighborhood or whether the customer has a good track record of returning to the pawnshop to recover items. Some customers may return several times over a year and pawn the same valuable item as a way of borrowing money, and they return each month to pay the interest and recover the itemSony VAIO VGN-CS21S/R battery.
As well, the pawnshop owner can assess the item and the pawner; if a non-disabled twenty year-old male comes into the pawnshop to pawn an electric wheelchair (perhaps the possession of his late grandfather), the pawnshop owner may doubt the man's claims that he will return for the wheelchair. On the other hand, if a middle aged man pawns a top quality set of golf clubsSony VAIO VGN-CS21S/P battery, the pawnshop owner may assess it as more credible that he will return for the items. The saleability of the item and the amount that the customer wants for it are also factored into the pawnbroker's assessment; if a customer offers a very salable item at a low price, the pawnbroker may accept it even if it is unlikely that the customer will return, because the pawnshop can turn around a quick profit on the itemSony VAIO VGN-CS19/W battery. If a customer offers a top quality, brand-name valuable at too low a price the pawnbroker may turn down the offer, because this suggests that the item may either be counterfeit or stolen.
Pawnbroker in Reseda, CA
Inventory management
Pawnshops have to be careful to manage how many new items they accept as pawns: either too little inventory or too much is bad. A pawnshop might have too little inventory if, for example, it mostly buys jewels and gold which are then reset and smelted, or perhaps the pawnshop owner quickly sells most of the items using specialty shops Sony VAIO VGN-CS19/R battery(e.g., musical instruments are sold to used music stores and stereos are sold to used hi-fi audio stores). In this case, the pawnshop will not be very interesting to customers, because it will be a mostly empty store with bare shelves and counters. Customers walking by a near-empty store will be less likely to be intrigued by the merchandise and come into the storeSony VAIO VGN-CS19/Q battery.
On the other extreme, if a pawnshop has a huge amount of inventory, there can be several disadvantages. If the store is crammed with used athletic gear, old stereos, and old tools, the store owner has to spend more time and money shelving and sorting the items, displaying them on different stands or in glass cases, and monitoring customers to prevent shopliftingSony VAIO VGN-CS19/P battery. If there are too many low-value, poor quality items, such as old toasters, scratched-up 20 year-old TVs, and worn-out sports gear piled into cardboard boxes, the store may begin looking more like a low-end rummage sale or flea market. Small, high-value items such as iPod players or cell phones need to be put in locked glass display cases, which means that the owner may need additional staff to unlock the cabinets and get out items that customers want to examineSony VAIO VGN-CS17H/W battery. As a store becomes more and more filled with items, an owner has to take more steps to protect inventory from theft by hiring staff to supervise the different parts of the store and/or by installing security cameras or alarms. The biggest problem with accumulating too much unsold inventory, though, is that this means that the store has not been able to pull out the value of these items by reselling them, which provides the store with cash that can be loaned out to borrowersSony VAIO VGN-CS17H/Q battery.
As such, the better option lies in the middle of the continuum. A store that has a moderate amount of good quality, brand-name items arranged neatly in the display windows attracts passersby, who are more likely to come in to peruse the items for sale. If the items are attractively laid out in display cases and shelves in an uncluttered fashionSony VAIO VGN-CS16T/W battery, the pawnshop has a more professional, reputable appearance. Once passersby start coming to the store to look at items, they may decide to bring unwanted items to the pawnshop for loans on subsequent visits. Some pawnshop owners prevent their store from developing a cluttered look by keeping some of the less attractive items such as snow tires, or items which are overstocked (e.g., if there are too many stereos) in a storage facility in the basementSony VAIO VGN-CS16T/T battery. Another approach used by some pawnshop companies is to operate a number of stores in a state or province. This way, the inventory can be moved between affiliated stores so that each store has a balanced inventory. For example, if a rural location of a pawnshop accumulates too much hunting and fishing gear, some of the overstock can be transferred to a suburban locationSony VAIO VGN-CS16T/R battery.
Some stores also slim down their inventory by selling some items to specialty used gear retailers. For example, if a pawnshop in a low-income neighborhood pays a customer $300 for a power amplifier that has a used retail value of about $2000, this stereo device may be hard to sell in the pawnshop, given that most of the stereos sell for a fraction of this priceSony VAIO VGN-CS16T/Q battery. However, a high-end used audio store in a well-to-do neighborhood might be able to sell it for $2000, so the pawnshop owner may decide to sell the amplifier to the audio shop for $1000, thus netting $700. Some pawnshops may sell specialty items on eBay or other websites. A specialty item such as a high-end model railroad set with a retail value of $1000 may not sell in the store, or it would only sell for a deep discount. However, if it is put up for sale on eBay or a similar websiteSony VAIO VGN-CS16T/P battery, a model train enthusiast 1000 miles away may decide to purchase the item and have it shipped to them.
Auxiliary operations
While the main business activities of a pawnshop are lending money for interest based on valuable items that customers bring in, some pawnshops also undertake other business activities, such as selling brand-new retail items that are in demand in the neighborhood of the store. Depending on where a pawnshop is located, these other retail items may range from guitar and musical instruments to firearmsSony VAIO VGN-CS13T/W battery. Some pawnbrokers also sell brand-new self defense items such as pepper spray or stun guns. Many pawnshops will also trade used items, as long as the transaction turns a profit for pawn shop. In cases where the pawnshop buys items outright, the money is not a loan; it is a straight payment for the item. Some pawnshops may keep a few unusual, high value items on display to capture the interests of passersby, such as a vintage Harley Davidson motorcycleSony VAIO VGN-CS13H/W battery; the owner is not typically expecting to sell these items. Other activities carried out by pawnshops are financial services including fee-based check cashing, payday loans, vehicle title or house title loans, and currency exchange services.
History
Main article: History of pawnbroking
In the west, pawnbroking existed in the Ancient Greek and Roman Empires. Most contemporary Western law on the subject is derived from the Roman jurisprudence. As the empire spread its culture, pawnbroking went with it. Likewise, in the East, Sony VAIO VGN-CS13H/R battery the business model existed in China 3000 years ago[1] no different than today, through the ages strictly regulated by Imperial or other authorities.
Modern pawnbroker storefront.
In spite of early Roman Catholic Church prohibitions against charging interest on loans, there is some evidence that the Franciscans were permitted to begin the practice as an aid to the poor.[citation needed] Pawnbrokerage arrived in England with William the Conqueror, but known by the Italian name, LombardSony VAIO VGN-CS13H/Q battery. In 1338, Edward III pawned his jewels to raise money for his war with France. King Henry V did much the same in 1415. The Lombards were not a popular class, and Henry VII harried them a good deal. In the very first year of James I Stuart an Act against Brokers was passed and remained on the statute-book until Queen Victoria had been on the throne thirty-five yearsSony VAIO VGN-CS13H/P battery. It was aimed at the many counterfeit brokers in London. This type of broker was evidently regarded as a fence. It is also known that Queen Isabella of Spain pawned her jewelry in order to send Christopher Columbus out to what he believed was the Indies.
Provident Loan Society of New York, a charitable pawnbroker
A similar system was used during the Crusades. Crusaders, predominantly in France, brokered their land holdings to monasteries and diocese for funds to provide supply, transit and outfitting for the Holy LandSony VAIO VGN-CS11Z/T battery. Instead of outright repayment the Church reaped a certain amount of crop returns for a certain amount of seasons, which could additionally be re-exchanged in a type of equity.
A pawnbroker can also be a charity. The Monte di Pietà movement was begun in Perugia, Italy, in 1450 by Barnaba Manassei, a Franciscan monk. It had the aim of providing financial assistance to people in the form of no-interest loans, secured with pawned items. Instead of interest, borrowers were urged to make donations to the ChurchSony VAIO VGN-CS11Z/R battery. It spread first through Italy then in other parts of Europe. The first Monte de Piedad organization in Spain was founded in Madrid, and from there the idea was transferred to New Spain by Pedro Romero de Terreros, the Count of Santa Maria de Regla[2] and Knight of Calatrava.[3] The Nacional Monte de Piedad is a charitable institution and pawn shop whose main office is located just off the Zocalo, or main plaza of Mexico CitySony VAIO VGN-CS11S/W battery. It was established between 1774 and 1777 by Pedro Romero de Terreros as part of a movement to provide interest-free or low-interest loans to the poor. It was recognized as a national charity in 1927 by the Mexican government.[3] Today it is a fast-growing institution with over 152 branches all over Mexico and with plans to open a branch in every Mexican city. Sony VAIO VGN-CS11S/Q battery
The economic downturn of 2008 saw the advent of the online pawnbrokers such as Borro, who offered customers the chance to gain finance against their assets without ever entering a pawn shop.[5]
Symbol
Symbol of pawnbrokers.
Pawnbroker's sign in Edinburgh Scotland
The pawnbrokers' symbol is three spheres suspended from a bar. The three sphere symbol is attributed to the Medici family of Florence, Italy, owing to its symbolic meaning of Lombard.[1] This refers to the Italian province of Lombardy, where pawn shop banking originated under the name of Lombard bankingSony VAIO VGN-CS11S/P battery. The three golden spheres were originally the symbol which medieval Lombard merchants hung in front of their houses, and not the arms of the Medici family. It has been conjectured that the golden spheres were originally three flat yellow effigies of byzants, or gold coins, laid heraldically upon a sable field, but that they were converted into spheres to better attract attention(Sony VAIO VGN-AW11M/H battery).
Most European towns called the pawn shop the "Lombard". The House of Lombard was a banking family in medieval London, England. According to legend, a Medici employed by Charlemagne slew a giant using three bags of rocks. The three-ball symbol became the family crest. Since the Medicis were so successful in the financial, banking(Sony VAIO VGN-AW11S/B battery), and moneylending industries, other families also adopted the symbol. Throughout the Middle Ages, coats of arms bore three balls, orbs, plates, discs, coins and more as symbols of monetary success. Pawnbrokers (and their detractors) joke that the three balls mean "Two to one, you won't get your stuff back".
Saint Nicholas is the patron saint of pawnbrokers. The symbol has also been attributed to the story of Nicholas giving a poor man's three daughters each a bag of gold so they could get married(Sony VAIO VGN-AW11Z/B battery).[6]
In Asia
Pawn shop in Malaysia
Pawn shop in Hong Kong
A typical Hong Kong pawn shop sign: a bat holding a coin.
In Hong Kong the practice follows the Chinese tradition, and the counter of the shop is typically higher than the average person for security. A customer can only hold up his hand to offer belongings and there is a wooden screen between the door and the counter for customers' privacy. The symbol of a pawn shop in Hong Kong is a bat (the animal) holding a coin(Sony VAIO VGN-AW19/Q battery) (Chinese: 蝠鼠吊金錢, Cantonese: fūk syú diu gām chín). The bat signifies fortune and the coin signifies benefits. In Japan, the usual symbol for a pawn shop is a circled digit seven, as "shichi", the Japanese word for seven, sounds similar to the word for "pawn" (質).
In Malaysia, a multi-race country, where Malaysian Chinese consists 25% of total population, initiated the Pawnbroker business. Nowadays, majority pawnbrokers in Malaysia are managed by Malaysian Chinese. In Malay, Pawn is called as "PAJAK GADAI"(Sony VAIO VGN-AW19 battery). A valid and licensed Pawnshop in Malaysia must always declare themselves as a "PAJAK GADAI" or a PAWNSHOP for their company registration. They must also fulfill the requirement of Ministry of Housing and Local Government, where the pawn counter is not higher than 4 feet, bullet-proof and stainless steeled counters, stainless steeled doors, strong rooms with automatic locks, safes, equipped with fully computerized system(Sony VAIO VGN-AW21M/H battery), CCTV, Alarm and Pawnbroker Insurance. The picture shows one of the Malaysia's Pawnshops that is located at Changlun, which is the only pawnshop that closes to the border of Thailand.
In the Philippines, the operation of pawnshops is managed by private businesses and is duly regulated by the Bangko Sentral ng Pilipinas. Pawnshops usually accept gold jewelry, appliances, gadgets, etc(Sony VAIO VGN-AW21S/B battery). Many pawnshops in the Philippines have adapted other services into their nationwide branches like Cebuana Lhuillier Pawnshop.Services like international and domestic remittance, insurance, bills payment, b2b money collection, e-loading for mobile phones, ticketing, and even banking are not unusual to see in a regular pawnshop the Philippines(SONY Vaio VGN-NS38M Battery).
In India, the Marwari Jain community pioneered the pawnbroking business, but today others are involved; the work is done by many agents called "saudagar". Instead of working from a shop, they go to needy people's homes and motivate them to become involved in the business. Pawn shops are often run as part of jewelry stores. Gold, silver, and diamonds are frequently accepted as collateral(SONY Vaio VGN-NS31S Battery). Pawnbroking is also a traditional trade in Thailand, where pawnshops are run both privately and by local governments. In Sri Lanka Pawnbroking is a lucrative business engaged in by specialized pawnbrokers as well as commercial banks and other finance companies.
Popular culture
Pawn Stars, an American reality television series (2009) appearing on the History Channel, chronicles the daily activities at the Gold and Silver Pawn Shop in Las Vegas, Nevada. A spinoff series, Cajun Pawn Stars, premiered in 2012 and focuses on the Silver Dollar Pawn and Jewelry Center in Alexandria, Louisiana(SONY Vaio VGN-NS31M Battery).
A similar show, Hardcore Pawn, premiered on TruTV in August 2010, concerning American Jewelry and Loan in Detroit, Michigan.
The Adventure of the Red-Headed League, an early Sherlock Holmes short story by Sir Arthur Conan Doyle, centers around a London pawnbroker and his somewhat shifty young clerk(SONY Vaio VGN-NS31Z Battery).
Due to their critical status within the financial system and the economy[citation needed] generally, banks are highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profitSony VPCEH3N6E battery. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords.
The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.[1]
History
Main article: History of banking
Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Sony VPCEH3N1E battery Perhaps the most famous Italian bank was the Medici bank, set up by Giovanni Medici in 1397.[3] The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy.[4]
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. Sony VPCEH3D0E battery
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 and a bankSony VPCEH3B1E battery.
Another possible origin of the word is from the Sanskrit words (ब्यय) 'byaya' (expense) and 'onka' (calculation) = byaya-onka. This word still survives in Bangla, which is one of the Sanskrit's child languages. ব্যায় + অঙ্ক = ব্যাঙ্ক . Such expense calculations were the biggest part of mathmetical treaties written by Indian mathmeticians as early as 500 B.CSony VPCEH2Z1E battery.
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:[6]
conducting current accounts for his customers
paying cheques drawn on him, and
collecting cheques for his customers.
Banco de Venezuela in Coro.
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 personsSony VPCEH2S9E battery, 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 organized or regulated.
The business of banking is in many English common law countries not defined by statute but by common law, the definition aboveSony VPCEH2Q1E battery. 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 purposes of entry regulating and supervising banks rather than regulating the actual business of bankingSony VPCEH2P0E battery. 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 cheques 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) Sony VPCEH2N1E battery.
"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[7]
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 instrumentSony VPCEH2M9E battery. 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.[8]
Banking
Standard activities
Large door to an old bank vault.
Banks act as payment agents by conducting checking or current accounts for customers, paying checks drawn by customers on the bank, and collecting checks deposited to customers' current accountsSony VPCEH2M1E battery. 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 lendingSony VPCEH2L9E battery.
Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank accountSony VPCEH2J1E battery.
Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings too. Sony VPCEH2H1E battery
Channels
Banks offer many different channels to access their banking and other services:
Automated Teller Machines
A branch is a retail location
Call center
Mail: most banks accept cheque deposits via mail and use mail to communicate to their customers, e.g. by sending out statements
Mobile banking is a method of using one's mobile phone to conduct banking transactions
Online banking is a term used for performing transactions, payments etc. over the Internet
Relationship Managers, mostly for private banking or business banking, often visiting customers at their homes or businessesSony VPCEH2F1E battery
Telephone banking is a service which allows its customers to perform transactions over the telephone with automated attendant or when requested with telephone operator
Video banking is a term used for performing 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.clarificationSony VPCEH2E0E battery
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[citation needed]. 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 activitiesSony VPCEH2D0E battery.
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 performanceSony VPCEH2C0E battery.
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 bankingSony VPCEH1Z1E battery, 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 loansSony VPCEH1S9E battery. 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 cardsSony VPCEH1S8E battery. 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 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 payments and fees charged to consumers and transaction fees to companies that accept the creditSony VPCEH1S1E battery- debit - cards. This helps in making profit and facilitates economic development as a whole.[9]
Risk and capital
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. Some of the main risks faced by banks include:
Credit risk: risk of loss[citation needed] arising from a borrower who does not make payments as promisedSony VPCEH1S0E battery.
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 execution of a company's business functions.
Reputational risk: a type of risk related to the trustworthiness of business.
Macroeconomic risk: risks related to the aggregate economy the bank is operating inSony VPCEH1M9E battery.[10]
The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted (see risk-weighted asset).
Banks in the economy
See 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 orderSony VPCEH1M1E battery. 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 instrumentsSony VPCEH1L9E battery. 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 menSony VPCEH1L8E battery.
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 unsecuredSony VPCEH1L0E battery; 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.
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 Sony VPCEH1J8E battery (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 createdSony VPCEH1J1E battery.
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) Sony VPCEH1E1E battery.
Banking crises have developed many times throughout history, when one or more risks have materialized 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 2000sSony VPCEH1AJ battery.
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 $96.4 trillion while profits declined by 85% to $115bn. 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 yearSony VPCCA3S1E battery. 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 $66.3bn in 2009, up 12% on the previous year.[11]
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).[citation needed] This is an indicator of the geography and regulatory structure of the USASony VPCCA3E1E battery, 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 UKSony VPCCA2Z0E battery.
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 definitionSony VPCCA2S1E battery.
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) Sony VPCCA2S0E battery 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 bankSony VPCCA2AJ battery.
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 accountSony VPCCA1S1E/W battery.
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 itSony VPCCA1S1E/P battery.
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 relationshipSony VPCCA1S1E/G battery.
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 capitalSony VPCCA1S1E/D battery
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 retail banking, dealing directly with individuals and small businesses; business banking, providing services to mid-market business; corporate banking, directed at large business entitiesSony VPCCA1S1E/B battery; private banking, providing wealth management services to high net worth individuals and families; and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit organizations.
Types of retail banks
National Bank of the Republic, Salt Lake City 1908
ATM Al-Rajhi Bank
National Copper Bank, Salt Lake City 1911
Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After the Great DepressionSony VPCCA1S1E battery, 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 businessesSony VPCCA1C5E battery.
Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners.
Community development banks: regulated banks that provide financial services and credit to under-served markets or populations.
Credit unions: 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 neighborhood, members of a certain labor union or religious organizations, and their immediate familiesSony VPCCA1AHJ battery.
Postal savings banks: savings banks associated with national postal systems.
Private banks: banks that manage the assets of high net worth individuals. Historically a minimum of USD 1 million was required to open an account, however, over the last years many private banks have lowered their entry hurdles to USD 250,000 for private investors. Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banksSony VPCCA1AGJ battery.
Savings bank: 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 infrastructureSony VPCCA1AFJ battery. 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 societySony VAIO VPCF11Z1E battery.
Building societies and Landesbanks: institutions that conduct retail banking.
Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially-responsible investments.
A Direct or Internet-Only bank is a banking operation without any physical bank branches, conceived and implemented wholly with networked computersSony VAIO VPCF11S1E battery.
Types of investment banks
Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital market activities such as mergers and acquisitions.
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 capital firms, they tend not to invest in new companiesSony VAIO VPCF11M1E/H battery.
Both combined
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 entitySony VAIO VPCF11M1E battery.
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 crisisSony VAIO VPCF119FJ battery.
Islamic banks adhere to the concepts of Islamic law. This form of banking revolves around several well-established principles based on Islamic canons. 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 customersSony VAIO VGN-CS33H battery.
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 unreferenced section requires citations to ensure verifiability.
United States
Main article: Banking in the United States
In the United States, the banking industry is a highly regulated industry with detailed and focused regulators. All banks with FDIC-insured deposits have the Federal Deposit Insurance Corporation (FDIC) as a regulator; however, for examinations, Sony VAIO VGN-CS33H/Z battery 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 OCCSony VAIO VGN-CS33H/B battery. 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 changingSony VAIO VGN-CS31Z/Q battery.
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 regulatorSony VAIO VGN-CS31S/W battery. 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 StatesSony VAIO VGN-CS31S/V battery.
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 marketSony VAIO VGN-CS31S/T battery. 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 suspectSony VAIO VGN-CS31S/R battery, 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 undetectedSony VAIO VGN-CS31S/P battery, resulting in a significant impact on the bank when they are recognized. 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 agingSony VAIO VGN-CS28 battery. 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, etcSony VAIO VGN-CS28/Q battery.
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. Treasury obligationsSony VAIO VGN-CS27 battery, 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.[12]
To compete for deposits, US savings institutions offer many different types of plans:[12]
Passbook or ordinary deposit accounts — permit any amount to be added to or withdrawn from the account at any timeSony VAIO VGN-CS27/W battery.
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 withdrawalSony VAIO VGN-CS27/R battery.
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 reasonsSony VAIO VGN-CS27/P battery.
Club accounts and other savings accounts — designed to help people save regularly to meet certain goals.
Accounting for bank accounts
Suburban 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. This means you credit a credit account to increase its balance, and you debit a credit account to decrease its balanceSony VAIO VGN-CS27/C battery.[13]
This also means you credit your savings account every time you deposit money into it (and the account is normally in credit), while you debit your credit card account every time you spend money from it (and the account is normally in debit). However, if you read your bank statement, it will say the opposite—that you credit your account when you deposit moneySony VAIO VGN-CS26T/W battery, and you debit it when you withdraw funds. If you have cash in your account, you have a positive (or credit) balance; if you are overdrawn, you have a negative (or deficit) balance.
Where bank transactions, balances, credits and debits are discussed below, they are done so from the viewpoint of the account holder—which is traditionally what most people are used to seeing.
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 termsSony VAIO VGN-CS26T/V battery, 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 depositsSony VAIO VGN-CS26T/T battery. 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 1980sSony VAIO VGN-CS26T/R battery. 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.[14]
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 riskSony VAIO VGN-CS26T/Q battery. 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 ActSony VAIO VGN-CS26T/P battery, 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 individualsSony VAIO VGN-CS26T/C battery. 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 pawnbroker is an individual or business (pawnshop or pawn shop) that offers secured loans to people, with items of personal property used as collateral. The word pawn is derived from the Latin pignus, for pledge, and the items having been pawned to the broker are themselves called pledges or pawns, or simply the collateralSony VAIO VGN-CS25H battery.
If an item is pawned for a loan, within a certain contractual period of time the pawner may purchase it back for the amount of the loan plus some agreed-upon amount for interest. The amount of time, and rate of interest, is governed by law or by the pawnbroker's policies. If the loan is not paid (or extended, if applicable) within the time periodSony VAIO VGN-CS25H/W battery, the pawned item will be offered for sale by the pawnbroker. Unlike other lenders, the pawnbroker does not report the defaulted loan on the customer's credit report, since the pawnbroker has physical possession of the item and may recoup the loan value through outright sale of the item. The pawnbroker also sells items that have been sold outright to them by customersSony VAIO VGN-CS25H/R battery.
Business model
Assessment of items
The pawning process begins when a customer brings an item into a pawn shop. Common items pawned (or, in some instances, sold outright) by customers include jewelry, electronics, musical instruments, and tools (both hand tools and power tools). In some of the United States, pawnshops with firearms licenses sell pistols and rifles to customers who meet state and federal acquisition criteria. In other states and other countriesSony VAIO VGN-CS25H/Q battery, though, such as Canada and the UK, pawnshops do not sell firearms. Gold, silver, and platinum are popular items which are often purchased; even if the source (such as a piece of broken jewelry) has little value, the metals can still be sold in bulk to a bullion dealer or smelter for the value of the gold, silver, or platinum content. Similarly, with jewelry that contains genuine gemstones, even if the jewelry is broken or missing piecesSony VAIO VGN-CS25H/P battery, the jewels may have value in their own right because they can be reset into a new item of jewelry.
The pawnbroker assumes the risk that an item might be stolen property; however, laws exist in many jurisdictions that protect both the community at large and the brokers from unknowingly engaging in criminal activity (handling stolen goods, also known as "fencing"). These laws often require the pawnbroker to establish positive identification of the seller through photo identification (such as a driver's license or government-issued identity document) Sony VAIO VGN-CS25H/C battery, as well as a holding period placed on an item purchased by a pawnbroker (to allow for local law enforcement authorities to track down stolen items). In some jurisdictions, pawnshops must give a list of all newly pawned items and any associated serial number to police, to allow the police to determine if any of the items have been reported as stolenSony VAIO VGN-CS23T/W battery. Many police departments will advise burglary or robbery victims to visit local pawnshops to see if they can locate stolen items which might have been pawned or sold to the pawnbroker. Some pawnshops set up their own screening criteria to avoid buying stolen property.
The pawnbroker assesses an item for its condition and marketability by testing the item (in the case of electronics or instruments) and examining it for flaws, scratches or other damageSony VAIO VGN-CS23T/Q battery. Another aspect that affects marketability is the supply and demand for the item in the community or region. In some markets, the used goods market is so flooded with used stereos and car stereos, for example, that pawnshops will only accept the higher-quality brand names. Alternatively, a customer may offer to pawn an item which will be difficult to sell, such as a surfboard in an inland region or a pair of snowshoes in tropical or sub-tropical regionsSony VAIO VGN-CS23H battery. The pawnshop owner will either turn down hard-to-sell items or offer a very low amount of money for these items. While some items will never get outdated, such as hammers and hand saws, electronics and computer items can quickly get out of date and become unsalable. As such, pawnshop owners have to learn about the different makes and models of computers, software and other electronic equipmentSony VAIO VGN-CS23H/S battery, so that they can discern between items which are still salable, and those which are obsolete.
To assess the value of different items, pawnbrokers use guidebooks ("Blue Books"), catalogs, Internet search engines, and their own experience to subjectively evaluate the goods. Some pawnbrokers have training in the identification of gems, or they employ a specialist with gem training to assess jewelrySony VAIO VGN-CS23H/B battery. One of the risks when accepting secondhand goods is that the item may be counterfeit. If the item is counterfeit, such as a fake Rolex watch, it may have only a fraction of the value of the genuine item. Once the pawnbroker has determined that the item is genuine and not likely to have been stolen, and that it is marketable, the pawnbroker offers the customer an amount for it. The customer can either sell the item outright if (as in most cases) the pawnbroker is also a licensed secondhand dealer, or offer the item as collateralSony VAIO VGN-CS23G battery.
Determining amount of loan
To determine the amount of the loan, the pawnshop owner needs to take into account several factors. One factor is the predicted resale value of the item. This is often thought of in terms of a range, with the low point being the wholesale value of the used good, in the case that the pawnshop is unable to sell it, and they decide to sell it to a wholesale merchant of used goodsSony VAIO VGN-CS23G/W battery. The higher point in the range is the retail sale price in the pawnshop. For example, a five-year-old 42" Sony TV may have been bought by the customer for $1000. However, as a used item in a pawnshop, it will only fetch $250 and $300, because the customers will be wary that it might be a "lemon" that the seller is getting rid of because it has some hard-to-detect problemSony VAIO VGN-CS23G/Q battery. Used electronics wholesalers will buy the TV for $100 to $150. The wholesaler pays a lower price than the retail value because they have the added cost of hiring electronics technicians who overhaul and repair the items so that they can be sold in used electronics stores.
The pawnshop owner takes into account their knowledge of supply and demand for the item in question to determine if they think that they will end up selling the TV for $100 to a wholesaler or $300 to a pawnshop customerSony VAIO VGN-CS23G/P battery. If the pawnshop owner believes that there are "too many used TVs around these days in town", they may fear that they will only get $100 for the TV if they have to unload it to a wholesaler. With that figure in mind as the expected revenue, the pawnshop owner has to factor in the overhead costs of the store (rent, heat, electricity, phone connection, yellow pages ad, website costsSony VAIO VGN-CS21Z/Q battery, staff costs, insurance, alarm system, etc.), and a profit for the business. As such, the customer who comes in with this TV that they paid $1000 for when it was new may be offered as little as $50 by the pawnshop owner, who is taking into account all of the risk and cost factors.
In determining the amount of the loan, the pawnshop owner also assesses the likelihood that the customer will pay the interest for several weeks or months and then return to repay the loan and reclaim the itemSony VAIO VGN-CS21S/W battery. Since the key to the pawnshop business model is making interest off the loaned money, pawnshop owners want to accept items that the customer is likely to want to recover, after having paid interest for a period on the loan. If, in an extreme case, a pawnshop only accepted items that customers had no interest in ever reclaiming, it would not make any money from interest, and the store would in effect become a second hand dealerSony VAIO VGN-CS21S/V battery.
Determining if the customer is likely to return to reclaim an item is a subjective decision, and wily customers may attempt to persuade the pawnshop owner that the item in question is important to them ("that necklace belonged to my grandmother, so I will certainly return for it"), and they will claim that they will return to recover itSony VAIO VGN-CS21S/T battery. The pawnshop owner can use a variety of factors to evaluate the likelihood that the customer will return, such as whether the customer lives in the neighborhood or whether the customer has a good track record of returning to the pawnshop to recover items. Some customers may return several times over a year and pawn the same valuable item as a way of borrowing money, and they return each month to pay the interest and recover the itemSony VAIO VGN-CS21S/R battery.
As well, the pawnshop owner can assess the item and the pawner; if a non-disabled twenty year-old male comes into the pawnshop to pawn an electric wheelchair (perhaps the possession of his late grandfather), the pawnshop owner may doubt the man's claims that he will return for the wheelchair. On the other hand, if a middle aged man pawns a top quality set of golf clubsSony VAIO VGN-CS21S/P battery, the pawnshop owner may assess it as more credible that he will return for the items. The saleability of the item and the amount that the customer wants for it are also factored into the pawnbroker's assessment; if a customer offers a very salable item at a low price, the pawnbroker may accept it even if it is unlikely that the customer will return, because the pawnshop can turn around a quick profit on the itemSony VAIO VGN-CS19/W battery. If a customer offers a top quality, brand-name valuable at too low a price the pawnbroker may turn down the offer, because this suggests that the item may either be counterfeit or stolen.
Pawnbroker in Reseda, CA
Inventory management
Pawnshops have to be careful to manage how many new items they accept as pawns: either too little inventory or too much is bad. A pawnshop might have too little inventory if, for example, it mostly buys jewels and gold which are then reset and smelted, or perhaps the pawnshop owner quickly sells most of the items using specialty shops Sony VAIO VGN-CS19/R battery(e.g., musical instruments are sold to used music stores and stereos are sold to used hi-fi audio stores). In this case, the pawnshop will not be very interesting to customers, because it will be a mostly empty store with bare shelves and counters. Customers walking by a near-empty store will be less likely to be intrigued by the merchandise and come into the storeSony VAIO VGN-CS19/Q battery.
On the other extreme, if a pawnshop has a huge amount of inventory, there can be several disadvantages. If the store is crammed with used athletic gear, old stereos, and old tools, the store owner has to spend more time and money shelving and sorting the items, displaying them on different stands or in glass cases, and monitoring customers to prevent shopliftingSony VAIO VGN-CS19/P battery. If there are too many low-value, poor quality items, such as old toasters, scratched-up 20 year-old TVs, and worn-out sports gear piled into cardboard boxes, the store may begin looking more like a low-end rummage sale or flea market. Small, high-value items such as iPod players or cell phones need to be put in locked glass display cases, which means that the owner may need additional staff to unlock the cabinets and get out items that customers want to examineSony VAIO VGN-CS17H/W battery. As a store becomes more and more filled with items, an owner has to take more steps to protect inventory from theft by hiring staff to supervise the different parts of the store and/or by installing security cameras or alarms. The biggest problem with accumulating too much unsold inventory, though, is that this means that the store has not been able to pull out the value of these items by reselling them, which provides the store with cash that can be loaned out to borrowersSony VAIO VGN-CS17H/Q battery.
As such, the better option lies in the middle of the continuum. A store that has a moderate amount of good quality, brand-name items arranged neatly in the display windows attracts passersby, who are more likely to come in to peruse the items for sale. If the items are attractively laid out in display cases and shelves in an uncluttered fashionSony VAIO VGN-CS16T/W battery, the pawnshop has a more professional, reputable appearance. Once passersby start coming to the store to look at items, they may decide to bring unwanted items to the pawnshop for loans on subsequent visits. Some pawnshop owners prevent their store from developing a cluttered look by keeping some of the less attractive items such as snow tires, or items which are overstocked (e.g., if there are too many stereos) in a storage facility in the basementSony VAIO VGN-CS16T/T battery. Another approach used by some pawnshop companies is to operate a number of stores in a state or province. This way, the inventory can be moved between affiliated stores so that each store has a balanced inventory. For example, if a rural location of a pawnshop accumulates too much hunting and fishing gear, some of the overstock can be transferred to a suburban locationSony VAIO VGN-CS16T/R battery.
Some stores also slim down their inventory by selling some items to specialty used gear retailers. For example, if a pawnshop in a low-income neighborhood pays a customer $300 for a power amplifier that has a used retail value of about $2000, this stereo device may be hard to sell in the pawnshop, given that most of the stereos sell for a fraction of this priceSony VAIO VGN-CS16T/Q battery. However, a high-end used audio store in a well-to-do neighborhood might be able to sell it for $2000, so the pawnshop owner may decide to sell the amplifier to the audio shop for $1000, thus netting $700. Some pawnshops may sell specialty items on eBay or other websites. A specialty item such as a high-end model railroad set with a retail value of $1000 may not sell in the store, or it would only sell for a deep discount. However, if it is put up for sale on eBay or a similar websiteSony VAIO VGN-CS16T/P battery, a model train enthusiast 1000 miles away may decide to purchase the item and have it shipped to them.
Auxiliary operations
While the main business activities of a pawnshop are lending money for interest based on valuable items that customers bring in, some pawnshops also undertake other business activities, such as selling brand-new retail items that are in demand in the neighborhood of the store. Depending on where a pawnshop is located, these other retail items may range from guitar and musical instruments to firearmsSony VAIO VGN-CS13T/W battery. Some pawnbrokers also sell brand-new self defense items such as pepper spray or stun guns. Many pawnshops will also trade used items, as long as the transaction turns a profit for pawn shop. In cases where the pawnshop buys items outright, the money is not a loan; it is a straight payment for the item. Some pawnshops may keep a few unusual, high value items on display to capture the interests of passersby, such as a vintage Harley Davidson motorcycleSony VAIO VGN-CS13H/W battery; the owner is not typically expecting to sell these items. Other activities carried out by pawnshops are financial services including fee-based check cashing, payday loans, vehicle title or house title loans, and currency exchange services.
History
Main article: History of pawnbroking
In the west, pawnbroking existed in the Ancient Greek and Roman Empires. Most contemporary Western law on the subject is derived from the Roman jurisprudence. As the empire spread its culture, pawnbroking went with it. Likewise, in the East, Sony VAIO VGN-CS13H/R battery the business model existed in China 3000 years ago[1] no different than today, through the ages strictly regulated by Imperial or other authorities.
Modern pawnbroker storefront.
In spite of early Roman Catholic Church prohibitions against charging interest on loans, there is some evidence that the Franciscans were permitted to begin the practice as an aid to the poor.[citation needed] Pawnbrokerage arrived in England with William the Conqueror, but known by the Italian name, LombardSony VAIO VGN-CS13H/Q battery. In 1338, Edward III pawned his jewels to raise money for his war with France. King Henry V did much the same in 1415. The Lombards were not a popular class, and Henry VII harried them a good deal. In the very first year of James I Stuart an Act against Brokers was passed and remained on the statute-book until Queen Victoria had been on the throne thirty-five yearsSony VAIO VGN-CS13H/P battery. It was aimed at the many counterfeit brokers in London. This type of broker was evidently regarded as a fence. It is also known that Queen Isabella of Spain pawned her jewelry in order to send Christopher Columbus out to what he believed was the Indies.
Provident Loan Society of New York, a charitable pawnbroker
A similar system was used during the Crusades. Crusaders, predominantly in France, brokered their land holdings to monasteries and diocese for funds to provide supply, transit and outfitting for the Holy LandSony VAIO VGN-CS11Z/T battery. Instead of outright repayment the Church reaped a certain amount of crop returns for a certain amount of seasons, which could additionally be re-exchanged in a type of equity.
A pawnbroker can also be a charity. The Monte di Pietà movement was begun in Perugia, Italy, in 1450 by Barnaba Manassei, a Franciscan monk. It had the aim of providing financial assistance to people in the form of no-interest loans, secured with pawned items. Instead of interest, borrowers were urged to make donations to the ChurchSony VAIO VGN-CS11Z/R battery. It spread first through Italy then in other parts of Europe. The first Monte de Piedad organization in Spain was founded in Madrid, and from there the idea was transferred to New Spain by Pedro Romero de Terreros, the Count of Santa Maria de Regla[2] and Knight of Calatrava.[3] The Nacional Monte de Piedad is a charitable institution and pawn shop whose main office is located just off the Zocalo, or main plaza of Mexico CitySony VAIO VGN-CS11S/W battery. It was established between 1774 and 1777 by Pedro Romero de Terreros as part of a movement to provide interest-free or low-interest loans to the poor. It was recognized as a national charity in 1927 by the Mexican government.[3] Today it is a fast-growing institution with over 152 branches all over Mexico and with plans to open a branch in every Mexican city. Sony VAIO VGN-CS11S/Q battery
The economic downturn of 2008 saw the advent of the online pawnbrokers such as Borro, who offered customers the chance to gain finance against their assets without ever entering a pawn shop.[5]
Symbol
Symbol of pawnbrokers.
Pawnbroker's sign in Edinburgh Scotland
The pawnbrokers' symbol is three spheres suspended from a bar. The three sphere symbol is attributed to the Medici family of Florence, Italy, owing to its symbolic meaning of Lombard.[1] This refers to the Italian province of Lombardy, where pawn shop banking originated under the name of Lombard bankingSony VAIO VGN-CS11S/P battery. The three golden spheres were originally the symbol which medieval Lombard merchants hung in front of their houses, and not the arms of the Medici family. It has been conjectured that the golden spheres were originally three flat yellow effigies of byzants, or gold coins, laid heraldically upon a sable field, but that they were converted into spheres to better attract attention(Sony VAIO VGN-AW11M/H battery).
Most European towns called the pawn shop the "Lombard". The House of Lombard was a banking family in medieval London, England. According to legend, a Medici employed by Charlemagne slew a giant using three bags of rocks. The three-ball symbol became the family crest. Since the Medicis were so successful in the financial, banking(Sony VAIO VGN-AW11S/B battery), and moneylending industries, other families also adopted the symbol. Throughout the Middle Ages, coats of arms bore three balls, orbs, plates, discs, coins and more as symbols of monetary success. Pawnbrokers (and their detractors) joke that the three balls mean "Two to one, you won't get your stuff back".
Saint Nicholas is the patron saint of pawnbrokers. The symbol has also been attributed to the story of Nicholas giving a poor man's three daughters each a bag of gold so they could get married(Sony VAIO VGN-AW11Z/B battery).[6]
In Asia
Pawn shop in Malaysia
Pawn shop in Hong Kong
A typical Hong Kong pawn shop sign: a bat holding a coin.
In Hong Kong the practice follows the Chinese tradition, and the counter of the shop is typically higher than the average person for security. A customer can only hold up his hand to offer belongings and there is a wooden screen between the door and the counter for customers' privacy. The symbol of a pawn shop in Hong Kong is a bat (the animal) holding a coin(Sony VAIO VGN-AW19/Q battery) (Chinese: 蝠鼠吊金錢, Cantonese: fūk syú diu gām chín). The bat signifies fortune and the coin signifies benefits. In Japan, the usual symbol for a pawn shop is a circled digit seven, as "shichi", the Japanese word for seven, sounds similar to the word for "pawn" (質).
In Malaysia, a multi-race country, where Malaysian Chinese consists 25% of total population, initiated the Pawnbroker business. Nowadays, majority pawnbrokers in Malaysia are managed by Malaysian Chinese. In Malay, Pawn is called as "PAJAK GADAI"(Sony VAIO VGN-AW19 battery). A valid and licensed Pawnshop in Malaysia must always declare themselves as a "PAJAK GADAI" or a PAWNSHOP for their company registration. They must also fulfill the requirement of Ministry of Housing and Local Government, where the pawn counter is not higher than 4 feet, bullet-proof and stainless steeled counters, stainless steeled doors, strong rooms with automatic locks, safes, equipped with fully computerized system(Sony VAIO VGN-AW21M/H battery), CCTV, Alarm and Pawnbroker Insurance. The picture shows one of the Malaysia's Pawnshops that is located at Changlun, which is the only pawnshop that closes to the border of Thailand.
In the Philippines, the operation of pawnshops is managed by private businesses and is duly regulated by the Bangko Sentral ng Pilipinas. Pawnshops usually accept gold jewelry, appliances, gadgets, etc(Sony VAIO VGN-AW21S/B battery). Many pawnshops in the Philippines have adapted other services into their nationwide branches like Cebuana Lhuillier Pawnshop.Services like international and domestic remittance, insurance, bills payment, b2b money collection, e-loading for mobile phones, ticketing, and even banking are not unusual to see in a regular pawnshop the Philippines(SONY Vaio VGN-NS38M Battery).
In India, the Marwari Jain community pioneered the pawnbroking business, but today others are involved; the work is done by many agents called "saudagar". Instead of working from a shop, they go to needy people's homes and motivate them to become involved in the business. Pawn shops are often run as part of jewelry stores. Gold, silver, and diamonds are frequently accepted as collateral(SONY Vaio VGN-NS31S Battery). Pawnbroking is also a traditional trade in Thailand, where pawnshops are run both privately and by local governments. In Sri Lanka Pawnbroking is a lucrative business engaged in by specialized pawnbrokers as well as commercial banks and other finance companies.
Popular culture
Pawn Stars, an American reality television series (2009) appearing on the History Channel, chronicles the daily activities at the Gold and Silver Pawn Shop in Las Vegas, Nevada. A spinoff series, Cajun Pawn Stars, premiered in 2012 and focuses on the Silver Dollar Pawn and Jewelry Center in Alexandria, Louisiana(SONY Vaio VGN-NS31M Battery).
A similar show, Hardcore Pawn, premiered on TruTV in August 2010, concerning American Jewelry and Loan in Detroit, Michigan.
The Adventure of the Red-Headed League, an early Sherlock Holmes short story by Sir Arthur Conan Doyle, centers around a London pawnbroker and his somewhat shifty young clerk(SONY Vaio VGN-NS31Z Battery).
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