Modern banking system and the obsolete concept of banking. Explain and illustrate in the worldwide aspect.

A bank is a monetary institution and a financial intercessor that collects deposits and passages those deposits into loaning activities, either straight or by capital markets. A bank joins clients with capital shortages to clients with capital surpluses.

Banking is usually a highly controlled industry, and government constraints on financial actions by banks have differed over location and time. The existing sets of global bank capital principles are called Basel II. In certain nations such as Germany, banks have traditionally possessed major stakes in manufacturing corporations whereas in other nations such as the United States banks are forbidden from holding non-financial companies. In Japan, banks are commonly the nexus of a cross-shareholding body known as the keiretsu. In Iceland banks had very loose regulation prior to 2008 collapse.

The most ancient bank still in presence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operational continuously since 1472.[1]

The description of a bank differs from one country to another. According to English common law, a banker is called as a person who performs the business of banking, which is stated as:

• directing current accounts for his clients
• paying checks drawn on him, and
• assembling checks for his customers

The trade of banking is in numerous English common law countries is defined by common law, the definition mentioned above but not by the statute. Though, in multiple cases the statutory meaning closely resembles the common law one.

• “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).
• “banking business” means the business of either or both of the following:

1. 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;
2. paying or collecting checks drawn by or paid in by customers.[2]

Banking activities were adequately significant in the second millennium BC in Babylonia that written form of standards were considered essential for practice. These laws were part of the Code of Hammurabi, which is the first known official laws. Apparently, these primeval banking transactions were very dissimilar in many ways to their contemporary counterparts. Deposits were made of grain, cattle or other crops and in time precious metals, but not of money.[3] Similar banking style arrangements could also be seen in ancient Egypt. These arrangements lessened from the condition that grain harvests need to be stored in central state granaries. Depositors could use written orders for the extraction of a certain amount of grain as payment.[4]

By the mid-17th century, the civil war had caused the expiration of the goldsmiths’ old-fashioned business of manufacturing objects of gold and silver. Forced to discover a way to create a living and have the earnings to safely stock valuable metal, they revolved to accepting deposits of prized metals for security. A receipt for the deposit would then be issued by the Goldsmith.  Initially, these receipts spread as form of money.  Nonetheless finally, the goldsmiths understood that, as not all of the depositors would claim their gold and silver at the same time, more receipts could be issued by them than the metal they had in their vault.

We can locate modern-day banking to practices in Genoa, Venice and Genoa of the Medieval cities of Italy. The Italian bankers gave loans to merchants who were engaged in intercontinental trade and to princes to finance wars and their extravagant lifestyles. Majority of the international trade of the medieval banks was performed through the usage of bills of exchange. At the plainest level, this required a creditor delivering local currency to the borrower in return for a bill testifying that a precise amount of  an alternative currency was payable at a date in the future? frequently at the following big international fair.

From there it spread across Europe. Throughout the 17th and 18th centuries timeline the British and the Dutch developed upon Italian banking practices.

Banks became an essential part of the US economy from the start of the Republic. Five years afterwards the Declaration of Independence, the very first chartered bank was formed in Philadelphia in 1781[5] and there were seventeen more by 1794. Initially, bank charters could only be gained over an act of legislation. Then, in 1838, New York approved the Free Banking Act, which permitted anyone to participate in banking business as long as a certain legal specifications were met by them.   As unrestricted banking rapidly spread to other states, difficulties related with the system soon became obvious.   For example, banks unified under these state laws had the privilege to issue their private bank notes. This directed to a variety of notes, a lot of which substantiated to be valueless in the all too common occurrence of a bank failure.

By means of the civil war came legislature that offered a federally chartered system of banks.   National banks were allowed to issue notes through this regulation and place a tax bank notes that was state issued. These nationwide bank notes came with a federal assurance, which secured the note-holder if the bank ever failed. This new law also took all banks under federal administration. In principle, it laid the grounds of the current banking system.

1. National Currency & Bank Acts (1863-64)

• Provided for chartering of National Banks by the U.S. Comptroller of the Currency
• Provided for nationally-issued currency

1. Federal Reserve Act (1913)

• Federal Reserve System was established

1. Bank Act of 1933 (Glass-Steagall)

• Prohibits payment of interest on demand deposits
• Establishes the FDIC
• Separates banking from investment banking
• Establishes interest rate ceilings on savings and time deposits
• Allows Federal Reserve to set stock margin requirements

1. Bank Holding Company Act (1956)

• Regulates formation of bank holding companies (BHC)
• Allows nonbank subsidiaries to operate across state lines

1. The Riegle-Neal Interstate Banking & Branching Efficiency Act of 1994

(10/22/94)

• As of 10/22/95 strong BHCs may acquire banks in any other state as long as:
• They are at least 5 years old and
• The new bank combination doesn’t control over 30% of deposits in the state or 10% of nationwide deposits
• As of 6/1/97 banks in BHCs across state lines may be converted to branches of the parent bank. Foreign banks may do the same thing.

1. The Gramm-Leach-Bliley Financial Modernization Act (11/12/99)

• Repeals the anti-competitive aspects of the Glass-Steagall Act of 1933
• Permits mergers & affiliations between banks/thrifts and brokers, investment and insurance companies
• Permits banks/thrifts, insurors and investment/brokers to sell each other’s’ products
• Prohibits non-financial companies from buying banks, thrifts, insurors or brokers
• Allows wider access to borrowing from Federal Home Loan banks for small banks and thrifts
• Strengthens consumer privacy and CRA protection

1. The USA Patriot Act, 2001

• Requires banks and other FIs to identify their customers…
• And to check customer IDs against terror suspects list…
• And to report suspicious customer transactions

1. The Sarbanes – Oxley Accounting Standards Act of 2002

• Creates a panel to promote objective audits of Public Companies
• Requires CEOs & CFOs to personally sign their company’s financial statements

1. FDIC Insurance Reform Act, 2006

• Raises insurance limits on IRAs, etc. to $250K
• Allows for inflation adjustments later
• Merges the FDIC’s, BIF and SAIF insurance funds

1. The Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010

• Creates a new Consumer Financial Protection Bureau (CFPB), in the Federal Reserve, to write new consumer protection rules applied to all financial firms
• Establishes a new Financial Stability Oversight Council (FSOC), to identify and control systemic risks to the financial systems.
• Calls for an end to the “Too-Big-to-Fail” (TBTF) policy that has shielded many large firms failing via handouts from the taxpayers.
• Requires hedge funds and private equity firms to register with the S.E.C.
• Bans most proprietary trading at commercial banks.
• Requires firms selling mortgage-backed securities (MBS) to retain at least a 5% share of the credit risk in them.
• Tightens rules for trading derivates by requiring them to trade through regulated exchanges.
• Requires the Government Accountability Office (GAO) to audit the Federal Reserve’s emergency lending programs.

The Late-2000s financial crisis triggered substantial pressure on banks all over the world. The fiasco of a big number of main banks resulted in government bail-outs. The failure and fire selling of Bear Stearns in March 2008[6] to JP Morgan Chase and that same year the end of Lehman Brothers in September steered to a credit crisis and worldwide banking catastrophes. In reply governments round the world nationalized, bailed-out, or arranged fire sales for a big number of key banks. Beginning on the 29 September 2008with the Irish government, governments all over the world even provides extensive guarantees supporting banks to dodge panic and complete failure the whole banking methods. These proceedings spawned the term ‘too big to fail’ and caused in a lot of debate about moral risk of these actions.

• Bangladesh: The Pakistani banking system at liberation (14 August 1947) involved of two branch offices of the past State Bank of Pakistan and seventeen huge commercial banks, two of which were regulated by Bangladeshi benefits and three by foreign persons other than West Pakistanis. There were fourteen smaller commercial banks.
• Canada: According to reports by the World Economic Forum, banking in Canada is broadly considered the most effective and secured banking system in the world,[7] positioned for the last three years as the world’s wide-ranging banking system.[8]
• Australia: The bank segment in Australia contains of a number of banks qualified to perform banking business accordingly to the Banking Act 1959, through a branch in Australia foreign banks certified to work, and Australian-incorporated foreign bank affiliates. The banking system is well developed, liquid and competitive.
• France: As of 11 October 2008, the Banking industry in France has, an regular leverage ratio of 28 to 1 and of the French GDP their short-term liabilities are equal to 60% or of its national debt 128%.[9] France operates the Fonds de Garantie des Depôts which is a deposit guarantee fund.
• Russia: There are important principles for banking in Russia. In the Russian Federation Banks should meet compulsory Russian legislation necessities, and obey with many Bank of Russia directions and guidelines.

• Boland, Vincent (2009-06-12). “Modern dilemma for world’s oldest bank”. Financial Times. Retrieved 23 February 2010.
• (Banking Ordinance, Section 2, Interpretation, Hong Kong) Note that in this case the definition is extended to include accepting any deposits repayable in less than 3 months, companies that accept deposits of greater than HK$100 000 for periods of greater than 3 months are regulated as deposit taking companies rather than as banks in Hong Kong.
• Davies, G. (1994), A History of Money from Ancient Times to the Present Day, Cardiff, UK, University of Wales Press.
• Davies (1994)  op. cit.
• Klebaner, B. J. (1974), Commercial Banking in the United States:  A History, Hinsdale, Illinois, Dryden Press.
• “Bank Guarantee Scheme & Recapitalisation”. National Treasury Management Agency. October 22, 2008.
• World Economic Forum – Global Competitiveness Report, World Economic Forum, In the 2010-2011 report Canada is ranked 1st in the “Soundness of banks” indicator
• Good news for all Canadians: World Economic Forum again ranks Canada’s banks as the world’s soundest – Canadian Banking Association
• Norris, Floyd (2008-11-10). “The World’s Banks Could Prove Too Big to Fail — or to Rescue”. NY Times. Retrieved 26 April 2010.