Thesis on "Principles of Banking"

Thesis 4 pages (1287 words) Sources: 5 Style: APA

[EXCERPT] . . . .

Banking

Modern banking has its antecedents in ancient Greece, where entrepreneurs undertook many of the basic functions still conducted by modern banks -- taking deposits, lending money and handling currency. Throughout the middle ages, various groups performed banking functions, mainly for royalty, traders and wealth landowners (Historyworld.net, no date). During this time, governance of the banking industry became stricter and the industry became more formalized.

For much of early banking history, the issue of interest was controversial. Christianity forbade the charging of interest and there were many instances where rulers banned bankers or interest-charging. Some banks, such as the Bank of St. George, were nonetheless able to prove successful, financing trade around the Mediterranean. As world trade grew more far-flung, risk levels increased. As a result, the banking profession grew and increased in complexity in response to the new operating environment of world trade, increasingly complicated by long distances, wars, and uncertain supply chains.

The National Bank Act at the end of the Civil War established the modern banking system in the United States, and the system developed in a similar fashion in other developed nations. The banking system was beginning to take shape, with a central bank and with stricter regulations.

The most fundamental function of banks is to act as a financial intermediary between savers and borrowers (SparkNotes, 2009). Banks accept deposits -- a form of safekeeping for money -- and then lend that money back out. The deposit function is seldom a viable business on its own, but it does serve a valuable purpose with respect to the safeguard of money. Physical forms of wealth are inherently insecure -- they can be stolen. Thus, banks provide security for such wealth. The lending function is where bankers can make profit. This function allows for economic expansion. It facilities capital investment, be it in housing or in equipment for a business.

Banks have expanded their role as facilitators of economic growth and capital preservation over the years. Banks now play a critical role in the creation of money. They lend to each other, in addition to the public. The result of this lending is that banks have a higher system-wide capacity for lending. Since more money can be lend, the needs of more borrowers can be met, spurring growth (Ibid).

Banks are just one of many different types of financial intermediaries. Although banks have expanded their roles over time, they have maintained a relatively strict role for themselves. They accept deposits and lend out the money in the form of mortgages, business loans, credit cards and lines of credit. The banks accept deposits in a variety of forms as well.

Banks are just one of many financial intermediaries that comprise the modern financial system. They are the second-largest financial intermediary, after pension funds (Federal Reserve Bank of San Francisco, 2001). Other institutional forms within the system are insurers, mutual funds, finance companies, credit unions and money market funds. Each has a specific role to play. Some of these institutions compete directly with banks in either deposits or lending. The leeway given to banks with respect to doing a wider range of business has helped them establish a strong market share, despite the increased amount of blurring between the different types of financial intermediaries (Marquis, 2001).

Banks maintain a vital role in the economy. They serve the financial needs of individuals through both their lending and deposit-taking functions. Banks provide consumers with safe storage for their money. Banks can do this by selling securities, but more commonly they do this through savings. To ensure that banks are able to fulfill this function, the federal government created the FDIC to insure bank deposits up to $100,000.

Consumers also benefit from the lending function. Bank loans finance a wide variety of consumer activity. These loans are used to make large purchase, such as… READ MORE

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