Bank

 BANK

 

👉A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans.^[1] Lending activities can be directly performed by the bank or indirectly through capital markets.

Whereby banks play an important role in financial stability and the economy of a country, most jurisdictions exercise a high degree of regulation over banks. Most countries have institutionalized a system known as fractional-reserve banking, under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, the Basel Accords.

Banking in its modern sense evolved in the fourteenth century in the prosperous cities of Renaissance Italy but in many ways functioned as a continuation of ideas and concepts of credit and lending that had their roots in the ancient world. In the history of banking, a number of banking dynasties – notably, the Medicis, the Fuggers, the Welsers, the Berenbergs, and the Rothschilds – have played a central role over many centuries. The oldest existing retail bank is Banca Monte dei Paschi di Siena (founded in 1472), while the oldest existing merchant bank is Berenberg Bank (founded in 1590).👍👍

👉The evolution of the banking industry has played an indispensable role in the development of the Indian economy. With every phase, the industry has adapted and diversified itself to make customers' financial lives easier and smoother while sustaining itself in the global economy. 

The banking industry dates back to the ancient world circa 1000 BC and has undergone many innovations to reach its current position in the global economy. What started as a simple barter system and gift economy has metamorphosed into a technology-driven and internet-based globalised banking system. The industry's progress in every aspect can also be seen in the Indian banking system. The changes in banking over time can be looked at in the following phases.

Phase 1: Pre- and early post-Independence 

Banking in India started in the 1700s. However, in the early days, the primary goal was to establish new banks and make the banking sector a relevant presence in Indian society. The pre-independence phase saw about 600 banks working together to make the nation's economy more robust by bringing in some considerable developments.

Bank of Bombay is considered to be the first bank in India, set up in 1720, while Bank of Hindustan, which is seen as one of India's first modern banks, was founded in Calcutta in 1770 only to shut operations in 1832. Few banks established in the mid-1800s merged and called themselves Imperial Bank of India. The collective eventually came to be known as State Bank of India. This period also saw the formation of several private banks, some of which are still operating today. Apart from the establishment of the banking system, the emergence of commercial banks and the merger of banks can be seen as significant developments of this era.👌👌

😕The bank lending process

Only a small portion of your deposits at a bank are actually held as cash at the bank. The rest of your money (the majority of the bank’s assets) is invested by the bank into vehicles such as consumer or business loans, government bonds and credit cards. Borrowers have to pay the bank back with interest. This process, in which banks distribute deposits out as loans, is called financial intermediation.

Where does your bank lend your money?

Although you don’t directly choose where your deposits are invested, you might be concerned about how your bank chooses to invest your money, especially if you care about finding a bank that aligns with your values.

If you’re concerned about environmental impact, for example, you could look for a bank that lends to environmental initiatives and avoids lending to things like fossil fuels. One way to find an environmentally friendly bank is to look for B-Corp or GABV certifications, which both require that a bank meets certain standards to reduce negative environmental impact.

Another helpful resource for finding out how your bank uses your deposits is Mighty Deposits, a searchable database that organizes public data about banks’ investments. You can search a specific bank on the site and see a breakdown of where it lends to, or you can search by a,specific criteri such as “above average in small business lending,” if there’s a particular issue you’re passionate about supporting.

How much do banks need in cash reserves?

The Federal Reserve sets regulations for banks to keep a certain amount of liquid assets — called the bank’s cash reserve. Cash reserves ensure that banks can pay out withdrawals.

However, as of March 26, 2020, the Fed eliminated all cash reserve requirements for banks. That means that banks no longer need to maintain a certain amount of your deposits as cash, though they still may do so to fund customers’ withdrawals.

Banks can also maintain a reserve by holding a portion of their assets in securities that can quickly be converted into cash, such as Treasuries.

When a bank doesn’t have enough cash to meet demand

Because banks lend out most of their deposits, the whole balance you see on your account isn’t physically there. When you withdraw money, it’s funded by the bank’s cash reserve, or banks can sell securities if their cash reserve isn’t enough to meet withdrawal demands.

However, there are instances when depositors withdraw their money en masse and a bank does not have enough in its reserve to pay out its customers. This effect is referred to as a bank run.😧👍