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ROLE OF BANKS IN ECONOMIC DEVELOPMENT

Banks in the economy Role in the money supply A bank raises funds by attracting deposits, borrowing money in the inter-bank market, or issuing financial instruments in the money market or a capital market. The bank then lends out most of these funds to borrowers. However, it would not be prudent for a bank to lend out all of its balance sheet. It must keep a certain proportion of its funds in reserve so that it can repay depositors who withdraw their deposits. Bank reserves are typically kept in the form of a deposit with a central bank. This behaviour is called fractional-reserve banking and it is a central issue of monetary policy. Some governments (or their central banks) restrict the proportion of a bank's balance sheet that can be lent out, and use this as a tool for controlling the money supply. Even where the reserve ratio is not controlled by the government, a minimum figure will still be set by regulatory authorities as part of bank regulation. Size of global banking industry Worldwide assets of the largest 1,000 banks grew 15.5% in 2005 to reach a record $60.5 trillion. This follows a 19.3% increase in the previous year. EU banks held the largest share, 50% at the end of 2005, up from 38% a decade earlier. The growth in Europes share was mostly at the expense of Japanese banks whose share more than halved during this period from 33% to 13%. The share of US banks also rose, from 10% to 14%. Most of the remainder was from other Asian and European countries. The US had by far the most banks (7,540 at end-2005) and branches (75,000) in the world. The large number of banks in the US is an indicator of its geographical dispersity and regulatory structure resulting in a large number of small to medium sized institutions in its banking system. Japan had 129 banks and 12,000 branches. In Western Europe, Germany, France and Italy had more than 30,000 branches each. This was twice the number of branches in the UK. Bank crises Banks are susceptible to many forms of risk which have triggered occasional systemic crises. Risks include liquidity risk (the risk that many depositors will request withdrawals beyond available funds), credit risk (the risk that those that owe money to the bank will not repay), and interest rate risk (the risk 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), among others. Banking crises have developed many times throughout history when one or more risks materialize for a banking sector as a whole. Prominent examples include the U.S. Savings and Loan crisis in 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the bank run that occurred during the Great Depression, and the recent liquidation by the central Bank of Nigeria.where about 25 banks were liquidated Types of retail banks Commercial bank is the term used for a normal bank to distinguish it from an investment bank. 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 corporations or large businesses. 3 Community development bankare regulated banks that provide financial services and credit to underserved markets or populations. Postal savings banks are savings banks associated with national postal systems. Private banks manage the assets of high net worth individuals. Offshore banks are banks located in jurisdictions with low taxation and regulation, . Many offshore banks are essentially private banks. Savings banks traditionally accepted savings deposits and issued mortgages. Today, some countries have broadened the permitted activities of savings banks. Building societies and Landesbanks both conduct retail banking A commercial bank is a type of financial intermediary and a type of bank. It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time deposits. It makes loans to businesses and consumers. It also buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds. This is what people normally call a "bank". The term "commercial" was used to distinguish it from an investment bank. Since the two genres of banks no longer have to be separate companies, some have used the term "commercial bank" to refer to banks which focus mainly on companies. Community development banks (CDBs) are a special kind of bank designed to serve the residents of and spur economic development in low to moderate income (LMI) areas. When CDBs provide retail banking services, they usually target customers from "financially underserved" demographics. Community development banks can apply for formal certification as a Community Development Financial Institution (CDFI) from the Community Development Financial Institutions Fund of the U.S. Department of the Treasury. Organizers wishing to start a de novo CDB in the United States can seek either a State or National bank charter. Like any national bank, all Federally-chartered CDBs are regulated primarily by the Office of the Comptroller of the Currency. According to the OCC Charter Licensing Manual, CDBs are required "to lend, invest, and provide services primarily to LMI individuals or communities in which it is chartered to conduct business." State-chartered Community Development Banks are subject to regulations, qualifications, and definitions that vary from state to state. The largest and oldest community development bank holding company is ShoreBank, headquartered in the South Shore neighborhood of Chicago. Through its holding company structure, ShoreBank Corporation promotes its community development mission by operating CDBs and other affiliates in certain U.S. cities. Private bank Private banks are banks which are not incorporated, and hence the entirety of their assets is available to meet the liabilities of the bank. These banks have a long tradition in Switzerland, dating back to at least the revocation of the Edict of Nantes (1685). However most have now become incorporated companies, so the term is rarely true anymore. Private banking is a term which refers to major institutional banks which offer financial services to private individuals. These banks would normally have two distinct divisions - private banking, and corporate banking. 4 Historically private banking has been viewed as very exclusive, only catering for wealthy individuals with liquidity over $1 million, although it is now possible to open some private bank accounts with no more than $50,000. An institution's private banking division will provide various services such as investment (wealth management), savings, inheritance and tax planning for their clients. The word "private" also alludes to client privacy and minimizing taxes via careful allocation of assets. A Swiss bank or offshore bank account may be used for this purpose. The largest private banking division is at UBS AG, and the most profitable private banking division is at Merrill Lynch.

Scale Private banking institutions showed an increase in profits and assets under management in 2004 following a period of slow growth between 2000 and 2003 caused by declines in equity markets and the slowdown of the global economy. According to Scorpio Partn erships annual Private Banking Benchmark study, pre-tax profits of 120 private banks in their study grew 30% in 2004 while their assets under management rose 13% to $6 trillion. More recent data shows that the top 25 private banks increased their assets by a further 7% in local currency terms in the first six months of 2005. According to Goldman Sachs, the flow of capital to private banking will increase by about 7% a year until 2007. After several years of decreases, private banking employment increased by 3.8% in 2004. Switzerland is the major location of private banking. Swiss banks hold an estimated 35 percent of the world's private and institutional funds, or 3 trillion Swiss francs. Offshore bank An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (aka "tax haven") that provides financial and legal advantages. These advantages typically include some or all of strong privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) An alternative to oppressive governement taxation and Banking regulations. While the term originates from the Channel Islands "offshore" from Britain, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location (Switzerland, Luxembourg and Andorra in particular are landlocked). Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements, the personal income tax of most countries makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accountswhich may or may not be numbered bank accountsthey may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are 5 protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. Following September 11, 2001, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens and clearing houses such as Clearstream, based in Luxembourg and being accused of being a crossroads for major illegal money flows. In reality it is simply the Domestic Banks and tax agencies trying to get some of the money held in offshore accounts. Offshore banking offers a real threat in terms of competition to the the banking and taxation systems in developed countries. The 80's and 90's saw financial deregulation around the developed world which benefited the consumer, but now rather than compete on a level playing field, OECD countries are trying to stamp out competition.protection against local political or financial instability easy access to deposits (at least in terms of regulation) low or no taxation (i.e. tax havens) less restrictive legal regulation Advantages of offshore banking Offshore banks provide access to politically and economically stable jurisdictions. This may be an advantage for those resident in areas where there is a risk of political turmoil who fear their assets may be frozen, seized or disappear. Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of governement intervention which acts as a tax on domestic banks. Offshore finance is one of the few industries, along with tourism, that geographically remote island nations can competitively engage in. Yet OECD countries are determined to stamp out this competition in order to preserve their own dominance. Interest is generally paid by offshore banks without being tax imposed. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income. Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and Investment opportunities not available from your country of residence. Offshore banks in some countries participate in mandatory bank account deposit protection insurance systems. Offshore banking is often linked to other services, such as trust and corporate management, which may have specific tax advantages or disadvantages for some individuals . Offshore banking ecourages financial deregulation by creating tax and banking competition. As first discussed by Charles Tiebout, there should be Tax competition so that people choose the right balance of service and taxes which they desire. Taxes have grown in real terms over the last 30 years in developed countries. Offshore Banking Helps developing countries to source investment and create growth in their economy. offshore Banking helps redistribute world finance. Disadvantages of offshore banking Not all offshore jurisdictions have depositor compensation schemes, to bail out depositors in the event that a bank becomes insolvent. Yet Most are much safer and have less history of banking problems than US banks for instance. Offshore banking has been associated with the underground economy and organized crime, through tax evasion and money laundering. Following September 11, 2001, 6 offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors in their shady operations. Henceforth, there is a risk of reputation being tarnished by association. This has come about due to propaganda supplied by government and financial bodies who have a vested intercorporate administration Not every bank provides each service. Banks tend to polarise between retail services and private banking services. Retail services tend to be low cost and undifferentiated, whereas private banking services tend to bring a personalised suite of services to the client.trustee services fund management investment management and investment custody letters of credit and trade finance foreign exchange wire- and electronic funds transfers credit deposit taking est in the extermination of competitive offshore banks. Offshore jurisdictions are often remote, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem. Accounts can be set up online, by phone or by mail. Developing countries can suffer due to the speed at which money can be transferred in and out of their economy as "hot money". This "Hot money" is aided by offshore accounts, and can increase problems in financial disturbance. Banking services It is possible to obtain the full spectrum of financial services from offshore banks, including: Statistics concerning offshore banking Offshore banking, which has a historic association with tax evasion or organized crime, is an important part of the international financial system. Experts believe that as much as half the world's capital flows through offshore centers. Tax havens have 1.2% of the world's population and hold 26% of the world's wealth, including 31% of the net profits of United States multinationals. According to Merrill Lynch and Gemini Consulting's World Wealth Report for 2000, one third of the wealth of the world's high net-worth individualsnearly $6 trillion out of $17.5 trillionmay now be held offshore. Some $3 trillion is in deposits in tax haven banks and the rest

is in securities held by international business companies (IBCs) and trusts. The IMF said that between $600 billion and $1.5 trillion of illicit money is laundered annually, equal to 2% to 5% of global economic output. Today, offshore is where most of the world's drug money is allegedly laundered, estimated at up to $500 billion a year, more than the total income of the world's poorest 20%. Add the proceeds of tax evasion and the figure skyrockets to $1 trillion. Another few hundred billion come from fraud and corruption. "These offshore centers awash in money are the hub of a colossal, underground network of crime, fraud, and corruption" commented Lucy Komisar quoting these statistics. Among offshore banks, Swiss banks hold an estimated 35% of the world's private and institutional funds (or 3 trillion Swiss francs), and the Cayman Islands are the fifth largest banking centre globally in terms of deposits. Regulation of offshore banks In the 21st century, regulation of offshore banking is allegedly improving, although critics maintain it remains largely insufficient. The quality of the regulation is monitored by supra-national bodies such as the International Monetary Fund (IMF). Banks are generally required to maintain capital adequacy in accordance with international standards. They must report at least quarterly to the regulator on the current state of the business. Since the late 1990s, especially following September 11, 2001, there has been a number of initiatives to increase the transparency of offshore banking, although critics such as the Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) non-governmental organization (NGO) maintain that they have been insufficient. A few examples of these are: The tightening of anti-money laundering regulations in many countries including most popular offshore banking locations means that bankers are required, by good faith, to report suspicion of money laundering to the local police authority, regardless of banking secrecy rules. There is more international co-operation between police authorities. In the US the Internal Revenue Service (IRS) introduced Qualifying Intermediary requirements, which mean that the names of the recipients of US-source investment income are passed to the IRS. Following 9/11 the US introduced the USA PATRIOT Act, which authorises the US authorities to seize the assets of a bank, where it is believed that the bank holds assets for a suspected criminal. Similar measures have been introduced in some other countries. The European Union has introduced sharing of information between certain jurisdictions, and enforced this in respect of certain controlled centres, such as the UK Offshore Islands, so that tax information is able to be shared in respect of interest. Joseph Stiglitz, 2001 Nobel laureate for economics and former World Bank Chief Economist, told to reporter Lucy Komisar, investigating on the Clearstream scandal: "You ask why, if there's an important role for a regulated banking system, do you allow a non-regulated banking system to continue? It's in the interest of some of the moneyed interests to allow this to occur. It's not an accident; it could have been shut down at any time. If you said the US, the UK, the major G7 banks will not deal with offshore bank centers that don't comply with G7 banks regulations, these banks could not exist. They only exist because they engage in transactions with standard banks."[1] In the 1970s through the 1990s it was possible to own your own personal offshore bank; mobster Meyer Lansky had done this to launder his casino money. Changes in offshore banking regulation in the 1990s in the form of "due diligence" (a legal construct) make offshore bank creation really only possible for medium to large multinational corporations that may be family owned or run. Savings bank A savings bank is a financial institution whose primary purpose is accepting savings deposits. It may also perform some other functions. Building society A building society is financial institution, owned by is members, that offers banking and other financial services, especially mortgage lending. 8 The term building society first arose in 19th century Britain from working men's cooperative savings groups: by pooling savings, members could buy or build their own homes. In the UK today building societies actively compete with banks for most "banking services" especially mortgage lending and deposit accounts. There are currently (2006) 63 building societies in the UK with total assets exceeding 260 billion. Origins The original Building Society was formed in Birmingham in 1774. Most of the original societies were fully terminating, where they would be dissolved when all members had a house: the last of them was wound up in 1980. In the 1830s and 1840s a new development took place with the Permanent Building Society, where the society continued on a rolling basis, continually taking in new members as earlier ones completed purchases. The main legislative framework for the Building Society was the Building Society Act of 1874, with subsequent amending legislation in 1894, 1939 and 1960. In their heyday, there were hundreds of building societies: just about every town in the country had a building society named after that town. Over succeeding decades the number of societies has decreased, as various societies merged to form larger ones, often renaming in the process: most of the existing larger building societies are the end result of the mergers of many smaller societies. Investment bank Investment banks assist public and private corporations in raising funds in the capital markets (both equity and debt), as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions. They also act as intermediaries in trading for clients. Investment banks differ from commercial banks, which take deposits and make commercial and retail loans. In recent years, however, the lines between the two types of structures have blurred, especially as commercial banks have offered more investment banking services. In the US, the Glass-Steagall Act, initially created in the wake of the Stock Market Crash of 1929, prohibited banks from both accepting deposits and underwriting securities; Glass-Steagall was repealed by the Gramm-Leach-Bliley Act in 1998. Investment banks may also differ from brokerages, which in general assist in the purchase and sale of stocks, bonds, and mutual funds. However some firms operate as both brokerages and investment banks; this includes some of the best known financial services firms in the world. Definitions There appears to be considerable confusion today about what does and does not constitute an "investment bank" and "investment banker". In the strictest definition, investment banking is the raising of funds, both in debt and equity, and the name of the division handling this in an investment bank is often called the "Investment Banking Division" (IBD). However, only a few small boutique firms solely provide this - such as Greenhill, with almost all investment banks heavily involved in providing additional financial services for clients such as the trading of fixed income, foreign exchange, commodity and equity securities. It is therefore acceptable to refer to both the "Investment Banking Division" and other 'front office' divisions such as "Fixed Income" as part of "investment banking", and any employee involved in either side an "investment banker". 9 More commonly used today to characterize what was traditionally termed "investment banking" is "sell side". This is trading securities for cash or securities (i.e., facilitating transactions, market making), or the promotion of securities (i.e. underwriting, research, etc.). Offering brokerage services to publicUnderwriting and distributing new security issues The "buy side" constitutes the pension funds, mutual funds, hedge funds, and the investing public who consume the products and services of the sell side in order to maximize their return on

investment. Some firms have both buy and sell side components. Role of modern investment banks - Today's Society The original purpose of an investment bank was to raise capital and advise on mergers and acquisitions and other corporate financial strategies. As banking firms have diversified, investment banks have come to fill a variety of roles (list taken from the Swiss Banking Institute): & Providing financial advice to corporate clientsinstitutional investors , especially on security issues, M&The main activities and units Large, global investment banks typically have several business units, including Investment Banking, concerned with advising public and private corporations; Research, concerned with producing reports on valuations of financial products; and Sales and Trading, concerned with buying and selling products both on behalf of the bank's clients and also for the bank itself. Banks undertake risk through Proprietary Trading, done by a special set of traders who do not interface with clients and through Principal Risk, risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. An investment bank is split into the so-called Front Office, Middle Office and Back Office, with Front Office widely deemed as having the highestcaliber employees in terms of intellectual and/or interpersonal capital, and Back Office the least. The individual activities are described below:Raising capital in the capital markets Investment banks have also moved into foreign exchange markets, private banking, asset management and bridge financing. Market-Making, in particular securities. Providing financial security research to investors and corporate customers A deals FRONT OFFICE Investment Banking, is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. Investment bankers prepare idea pitches that they bring to meetings with their clients, with the expectation that their effort will be rewarded with a mandate when the client is ready to undertake a transaction. Once mandated, an investment bank is responsible for preparing all materials necessary for the transaction as well as the execution of the deal, which may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the Investment Banking Division include Mergers & Acquisitions (M&A) and Corporate Finance. Financial Markets is split into four key divisions: Sales, Trading, Research and Structuring. Sales and Trading, is often the most profitable area of an investment bank, responsible for the majority of revenue of most investment banks. In the process of market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need. Research, is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. In recent years the relationship between investment banking and research has become highly regulated, reducing its importance to the investment bank. Structuring has been a relatively recent division as Derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. MIDDLE OFFICE Risk Maagement involves analysing the risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. BACK OFFICE Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. Whilst it provides the greatest job security of divisions within an investment bank, it is widely known to involve the most monotonous work at relatively low pay. Technology - Every major investment bank has considerable amounts of in-house software, created by the Technology team, who are also responsible for Computer and Telecommunications-based support. Size of industry Global investment banking revenue increased for the third year running in 2005 to $52.8bn. This was up 14% on the previous year but 7% below the 2000 peak. The recovery in the global economy and capital markets resulted in an increase in M&A activity which has been the primary source of investment banking revenue in recent years. There was a decline in revenue between 2000 and 2002 caused by the adverse economic conditions, and a sharp fall in equity markets. The US was the primary source of investment banking income in 2005 with 51% of the total, a proportion which has fallen somewhat during the past decade. Europe (with Middle East and Africa) generated 31% of the total, slightly up on its 30% share a decade ago. Asian countries generated the remaining 18%. Between 2002 and 2005, fee income from Asia increased by 98%. This compares with a 55% increase in Europe and 46% increase in the US during this period. Recent evolution of the business Investment Banking is one of the most global industries, and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout Investment Banking history, many have theorized that all investment banking products and services would be commoditized. However, new products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these cannot be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins. For example, trading bonds and equities for customers is now a commodity business, but structuring and trading derivatives is highly profitable. Each contract has to be uniquely structured to match the client's need, may involve complex pay-off and risk profiles, and is not listed on any market. In addition, while many products have been commoditized, an increasing amount of investment bank profit has come from proprietary trading, where size creates a positive network benefit (since the more trades an investment bank does, the more it knows about the market flow, allowing it to theoretically make better trades and pass on better guidance to clients). Global debt, equitySecurities underwriting Securities underwriting is a way of placing a newly issued security, such as stocks or bonds, with investors. A syndicate of banks (the lead-managers), underwrite the transaction, which means they have taken on the risk of distributing the securities. Should they not be able to find enough investors, then they end up holding some securities themselves. League tables Underwriting activity reported in Thomson Financial League Tables (numbers in $ billion) (number of issues in parenthesis): & 2001: 4,112 (?) (Q4 2002 report)2002: 4,257 (?) (Q4 2003 report), 3,902 (14,070) (Q4 2002 report) 2003: 5,326 (19,706) (Q4 2003 report) 2004: 5,693 (20,066) (Q4 2004 report) equity-related

Insurance underwriting Underwriting may also refer to insurance; insurance underwriters figure out how risky it is to insure people and businesses. They also decide how much coverage they should receive and how much they should pay for it. Underwriting involves measuring risk exposure and determining the premium with which to insure that risk. Each insurance company uses its own set of underwriting guidelines in order to determine whether or not the company should accept a proposal. In life insurance this decision process sometimes requires that applicants provide further medical evidence. The underwriters can decide to make a counteroffer in which the premiums have been loaded, or in which various exclusions have been stipulated, which restrict the circumstances under which a claim would be paid. Some companies use automated underwriting systems to encode these rules, and reduce the amount of manual work in processing proposals; some such systems are available from reinsurers. Merchant bank In banking, a merchant bank is a traditional term for an Investment Bank. It can also used to describe the private equity activities of banking. This article is about the history of banking as developed by merchants, from the Middle Ages onwards. History Merchant banks, now so called, are in fact the original "banks". These were invented in the middle ages by Italian grain merchants. As the Lombardy merchants and bankers grew in stature on the back of the Lombard plains cereal crops many of the displaced Jews who had fled persecution in Spain after 613 entered the trade. They brought with them to the grain trade ancient practices that had grown to normalcy in the middle and far east, along the Silk Road, for the finance of long distance goods trades. The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy, along side the local traders, and set up their benches to trade in crops. They had one great advantage over the locals. Christians were strictly forbidden the sin of usury. The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurous rates by the Church. In this way they could secure the grain sale rights against the eventual harvest. They then began to advance against the delivery of grain shipped to distant ports. In both cases they made their profit from the present discount against the future price. This twohanded trade was time consuming and soon there arose a class of merchants, who were trading grain debt instead of grain. It was a short step from financing trade on their own behalf to settling trades for others, and then to holding deposits for settlement of "billete" or notes written the people who were still brokering the actual grain. And so the merchant's "benches" (bank is a corruption of the Italian for bench, as in a counter) in the great grain markets became centers for holding money against a bill (billette, a note, a letter of formal exchange, later a bill of exchange, later still, a cheque). These deposited funds were intended to be held for the settlement of grain trades, but often were used for the bench's own trades in the meantime. The term bankrupt is a corruption of the Italian banca rotta, or broken bench, which is what happened when someone lost his traders' deposits. Being "broke" has the same connotation. A sensible manner of discounting interest to the depositors against what could be earned by employing their money in the trade of the bench soon developed; in short, selling an "interest" to them in a specific trade, thus overcoming the usury objection. Once again this merely developed what was an ancient method of financing long distance transport of goods. Islamic banking has the same constraints against usury as Christianity and from the same old testament notions. It will be interesting to see if, as Islam ages and matures, it relaxes its insistence that money cannot be earned from deposits held as debt. The medieval Italian markets were disrupted by wars and in any case were limited by the fractured nature of the Italian states. And so the next generation of bankers arose from migrant Jewish merchants in the great wheat growing areas of Germany and Poland. Many of these merchants were from the same families who had been part of the development of the banking process in Italy. They also had links with family members who had, centuries before, fled Spain for both Italy and England. This course of events set the stage for the rise of banking names which still resonate today: Schroders, Warburgs, Rothschilds, even the illfated Barings, were all the product of the continental grain trade, and indirectly, the early Iberian persecution of Jews. Venture capital firm A venture capital firm is a financial intermediary that pools the resources of its partners and uses the funds to help entrepreneurs start up new businesses. Financial services Financial services is a term used to refer to the services provided by the finance industry. Financial services is also the term used to describe organizations that deal with the management of money. Banks, investment banks, insurance companies, credit card companies and stock brokerages, are examples of the types of firms comprising the industry, which provides a variety of money and investment and related services. Financial services is the largest industry (or industry category) in the world, in terms of earnings; as of 2004, the industry represents 20% of the market capitalization of the S&P 500. Islamic banking refers to a system of banking or banking activity which is consistent with Islamic law (Sharia) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. Generally, Islamic law also prohibits trading in financial risk (which is seen as a form of gambling). In addition, Islamic law prohibits investing in businesses that are considered haram (such as businesses that sell alcohol or pork, or businesses that produce un-Islamic media). In the late 20th century, a number of Islamic banks were created, to cater to this particular banking market. Financial instruments Financial instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. Their diversity of forms mirrors the diversity of risk that they manage. Financial instruments can be categorised according to whether they are cash instruments or derivatives of other instruments. Cash instruments can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer. Derivative instruments can be divided into exchange traded derivatives and over-thecounter (OTC) derivatives. Alternatively they can be categorised by 'asset class' depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term. Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category. Combining the above methods for categorisation, the main instruments can be organized into a matrix as follows: INSTRUMENT TYPE ASSET CLASS Securities Other cash Exchange traded derivatives OTC derivatives Debt (Long Term) >1 year Bonds Loans Bond futures Options on bond futures Interest rate swaps Interest rate caps and floors Interest rate options Exotic instruments Debt (Short- Term) <=1 year Bills, e.g. T-Bills Commercial paper Deposits Certificates of deposit Short term interest rate futures Forward rate agreements Equity Stock N/A Stock options Equity futures Stock options Exotic instruments Foreign Exchange N/A Spot foreign exchange Currency futures Foreign exchange options Outright forwards Foreign exchange swaps Currency swaps Some instruments defy categorisation into the above

matrix, for example repurchase agreements. Bank regulation Bank regulations are a form of government regulation which subjects banks to certain requirements, restrictions and guidelines, aiming to uphold the soundness and integrity of the financial system. Merrill Lynch 4 billionMorgan Stanley 5 billion Wachovia 5 billion UBS AG 6 billion JP Morgan Chase 7 billion Wells Fargo 7 billion Royal Bank of Scotland 8 billion HSBC 10 billion Bank of America 15 billion Citigroup 21 billion Mitsubishi Tokyo Financial Group 832 billion Top ten bank holding companies in the world ranked by profit in 2003 (in U.S. dollars) BNP Paribas 835 billion ING Group 843 billion Fannie Mae 888 billion Deutsche Bank 892 billion Sumitomo Mitsui Financial Group 903 billion UBS 907 billion Allianz 1,002 billion Citigroup 1,097 billion Mizuho Financial Group 1,265 billion BNP Paribas 35 billion Top ten banking groups in the world ranked by assets in 2003 (in U.S. dollars) HBOS 36 billion Mizuho Financial Group 39 billion Mitsubishi Tokyo Financial Group 40 billion Royal Bank of Scotland 43 billion Credit Agricole Group 63 billion Bank of America 64 billion HSBC 67 billion JP Morgan Chase 69 billion Citigroup 73 billion Reserve requirement The reserve requirement sets the minimum reserves each bank must hold to customer deposits and notes. This type of regulation has perhaps lost the role it once had in places like the United States. In 2004 deposits in United States banks were roughly $8 trillion while central bank "reserves of depository institutions" were less than $50 billion. This is because reserve requirements apply to just transaction deposits today. The reason for these reserves are both to put a limit on how much the supply of deposits (money and credit) can grow. They also work as a cushion in case of a severe recession that leads to a "bank run." Capital requirement The capital requirement sets a framework on how banks and depository institutions must handle their capital in relation to their assets. Internationally, the Bank for International Settlements's Basel Committee on Banking Supervision influences each country's capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accords. The latest capital adequacy framework is commonly known as Basel II. In the United States, "depository institutions" are subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System (FRB). Deposit insurance Deposit insurance is a measure taken by banks in many countries to protect their clients' savings, either fully or in part, against any possible situation that would prevent the bank 15 from returning said savings. Deposit insurance institutions are for the most part government run or established, and may or may not be a part of a country's central bank. Many national deposit insurance agencies are members of the International Association of Deposit Insurers (IADI), an international organization established to promote deposit insurance, help countries without deposit insurance to establish their own agencies, and promote the exchange of knowledge and experiences between deposit insurers of different countries. The United States was the first country to establish an official deposit insurance scheme, during a great Depression banking crisis in 1934. By 2003, 88 countries had such schemes. Bank Size Information Top ten banking groups in the world ranked by tier 1 capital in 2004 (in U.S. dollars) Top ten bank holding companies in the U.S. ranked by deposits (in U.S. dollars) As of June 30, 2004. These are U.S. deposits only. This is not a ranking of the largest U.S. based global banks. Bank of America Corp. 526 billion Wells Fargo & Co. 256 billion Wachovia Corp. 238 billion J.P. Morgan Chase & Co. 227 billion (1) Citigroup Inc. 193 billion Bank One Corp. 150 billion (1) U.S. Bancorp 112 billion SunTrust Banks, Inc. 78 billion BB&T Corporation 67 billion National City Corp. 64 billion Online banking Online banking (or Internet banking) is a term used for performing transactions, payments etc. over the internet through a bank's secure website. This can be very useful, especially for banking outside bank hours (which tend to be very short) and banking from anywhere where internet access is available. In most cases a web browser such as Internet Explorer or Mozilla Firefox is utilised and any normal internet connection is suitable. No special software or hardware is usually needed. Convenience The number of customers who choose online banking as their preferred method of dealing with their finances is growing rapidly. Many people appreciate the convenience. Online banking usually offers such features as electronic bill payment and the downloading of bank statements for import in a personal finance program. There is a growing number of banks that operate exclusively online. Because these online banks have low costs compared to traditional banks they can offer high interest rates. Security Protection through single password authentication, as is the case in most secure internet shopping sites, is not considered secure enough for personal online banking applications in some countries. Online banking user interfaces are secure sites (generally employing the https protocol) and traffic of all information - including the password - is encrypted, making it next to impossible for a third party to obtain or modify information after it is sent. However, encryption alone does not rule out the possibility of hackers gaining access to vulnerable home PCs and intercepting the password as it is typed in (keylogging). There is also the danger of password cracking and physical theft of passwords written down by careless users. Many online banking services therefore impose a second layer of security. Strategies vary, but a common method is the use of transaction numbers, or TANs, which are essentially single use passwords. Another strategy is the use of two passwords, only random parts of which are entered at the start of every online banking session. This is however slightly less secure than the TAN alternative and more inconvenient for the user. A third option, used in many European countries and currently being trialled in the UK is providing customers with security token devices capable of generating single use passwords unique to the customer's token (this is called two-factor authentication or 2FA). Another option is using digital certificates, which digitally sign or authenticate the transactions, by linking them to the physical device (e.g. computer, mobile phone, etc). In the United States, most online banking still uses single password protection. Banks in many European countries (including the Scandinavian countries, The Netherlands, Austria and Belgium) are offering online banking for e-commerce payments directly from customer to merchants. Fraud Some customers avoid online banking as they perceive it as being too vulnerable to fraud. The security measures employed by most banks are never 100% safe, but in practice the number of fraud victims due to online banking is very small. Indeed, conventional banking practices may be more prone to abuse by fraudsters than online banking. Credit card fraud, signature forgery and identity theft are far more widespread "offline" crimes than malicious hacking. Bank transactions are generally traceable and criminal penalties for bank fraud are high. Online banking can be more insecure if users are careless, gullible or computer illiterate. An increasingly popular criminal practice to gain access to a user's finances is phishing, whereby the user is in some way persuaded to hand over their password(s) to the fraudster. Checkable deposits includes demand deposits, automatic transfer service account, Negotiable Order of Withdrawal account, and other deposits on which a check may be drawn. Savings deposits are accounts maintained by commercial banks, savings and loan associations, credit unions, and mutual savings banks

that pay interest but can not be used directly as money (by, for example, writing a check). These accounts let customers set aside a portion of their liquid assets that could be used to make purchases. But to make those purchases, savings account balances must be transferred to "transaction deposits" (or "checkable deposits") or currency. However, this transference is easy enough that savings accounts are often termed near money. Savings accounts, as such constitute a sizeable portion of the M2 monetary aggregate. With savings accounts you can make withdrawals, but you do not have the flexibility of using checks to do so. As with an MMDAs (money market deposit account), the number of withdrawals or transfers you can make on the account each month is limited. Loan A loan is a type of debt. All material things can be lent but this article focusses exclusively on financial loans. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. Acting as a provider of loans is one of the principal task for financial institutions. For banks loans are generally funded by deposits. For other institutions issuing of debt contracts, such as bonds is a typical source of funding. Other types of debt include mortgages, credit card debt, bonds, and lines of credit. A mortgage is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The bank, however, is given the title to the house until the mortgage is paid off in full. If the borrower defaults on the loan, the bank can repossess the house and sell it, to get their money back. The abuse in the granting of loans is known as predatory lending. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over him or her. Cheque A cheque, or (in American English) check, thought to have developed from Persian chek, is a negotiable instrument instructing a financial institution to pay a specific amount of a specific currency from a specific demand account held in the maker/depositor's name with that institution. Both the maker and payee may be natural persons or legal entities. History During the first century A.D., banks in the Persia (Iran) and other territories in Persian empire under Sassanid dynasty issued letters of credit known as Sakks. They are considered the basis for the modern cheque. The cheque had its origins in the ancient banking system, in which bankers would isignature of the draweramount of currency payee date of issue account number cheque number place of issue ssue orders at the request of their customers, to pay money to identified payees. Such an order was referred to as a bill of exchange. The use of bills of exchange facilitated trade by eliminating the need for merchants to carry large quantities of currency (e.g. gold) to purchase goods and services. A draft is a bill of exchange which is payable on demand of the payee. The cheque was originally titled such (variously spelled 'check', 'checque' and 'cheque') in reference to the counterfoil used to check against forgery and alterations. In usage up to and including 18th century, 'cheque' had survived as a variant spelling for the word in other meanings (e.g., 'examination', 'inspection') as well, but during that period, the spelling 'cheque' in the sense 'bank note' and 'check' in all other senses appear to have become distinct and cemented among all the English-speaking world outside the U.S. J. W. Gilbart in 1828 (A practical treatise on banking, 2nd ed, 1828, Effingham Wilson, London) explains in a footnote 'Most writers spell it check. I have adopted the above form because it is free from ambiguity and is analogous to the ex-chequer, the royal treasury. It is also used by the Bank of England "Cheque Office"'. According to Holden, the spelling 'check' survived in some English text-books into the 1920s (M J Holden, History of Negotiable Instruments in English Law, 1955, University of London Press, London). While the British Isles and all Commonwealth countries have adopted the spelling "cheque", the U.S. has retained the form "check". Parts of a cheque A cheque shall contain: A cheque is generally valid for six months after the date of issue unless otherwise indicated, but this varies depending on where the cheque is drawn. In Australia, for example, it is fifteen months. Legal amount (amount in words) is also highly recommended but not strictly required. Types of cheque in the United States In the United States, cheques (or checks) are governed by Article 3 of the Uniform Commercial Code. An order check the most common form in the US is payable only to the named payee or his or her indorsee, as it usually contains the language "Pay to the order of (name)." A bearer check is payable to anyone who is in possession of the document: this would be the case if the check does not state a payee, or is payable to "bearer" or to "cash" or "to the order of cash", or if the check is payable to someone who is not a person or legal entity, e.g. if the payee line is marked "Happy Birthday". In the United States, the terminology for a cheque historically varied with the type of financial institution on which it is drawn. In the case of a savings and loan association it was a negotiable order of withdrawal; if a credit union it was a share draft. Checks as such were associated with chartered commercial banks. However, common usage has increasingly conformed to more recent versions of Article 3, where check means any or all of these negotiable instruments. Usage Parties to regular cheques generally include a maker or drawer, the depositor writing a cheque; a drawee, the financial institution where the cheque can be presented for payment; and a payee, the entity to whom the maker issues the cheque. Ultimately there is also at least one endorsee which would typically be the financial institution servicing the payee's account, or in some circumstances may be a third party to whom the payee owes or wishes to give money. A payee that accepts a cheque will typically deposit it in an account at the payee's bank, and have the bank process the cheque. In some cases, the payee will take the cheque to a branch of the drawee bank, and cash the cheque there. If a cheque is refused at the drawee bank (or the drawee bank returns the cheque to the bank that it was deposited at) because there are insufficient funds for the cheque to clear, it is said that the cheque has bounced. When a maker directs the maker's bank to deduct the funds for the amount of a cheque from the maker's account, thus guaranteeing funds will be available for the cheque to clear, and the bank indicates this fact by making a notation on the face of the cheque (technically called an acceptance), the instrument is then referred to as a certified cheque. In Europe, a drawer may present a cheque guarantee card with the cheque when paying a retailer. If the retailer writes the card number on the back of the cheque, the cheque was signed in the retailer's presence, and the retailer verifies the signature on the cheque against the signature on the card, then the cheque cannot be cancelled and payment cannot be refused. A cheque used to pay wages due is referred to as a payroll cheque. Payroll cheques issued by the military to soldiers, or by some other government entities to their employees, beneficiants, and creditors, are referred to as warrants. A travelers cheque is designed to allow the person signing it to make an unconditional payment to someone else as a result of paying the account holder for that privilege. Travelers cheques can usually be replaced if lost or stolen, they are often used by people on vacation instead of cash. The use of credit or debit cards has, however, begun to replace the travelers cheque as the standard for vacation money, with an increase in usage by spenders due to ease of use, and an increase of businesses preferring transfers of this kind over travelers

cheques. This has resulted in some businesses to no longer accept travelers cheques as currency. A cheque sold by a post office or merchant such as a grocery for payment by a third party for a customer is referred to as a money order or postal order. A cheque issued by a bank on its own account for a customer for payment to a third party is called a cashier's cheque, a treasurer's cheque, a bank cheque, or a bank draft. A cheque issued by a bank but drawn on an account with another bank is a teller's cheque. In addition to issuing cashier's and teller's cheques, banks often sell money orders, and travelers cheques are usually purchased from banks. Some public assistance programs such as the Special Supplemental Nutrition Program for Women, Infants and Children, or Aid to Families with Dependent Children make vouchers available to their beneficiaries, which are good up to a certain monetary amount for purchase of grocery items deemed eligible under the particular program. The voucher can be deposited like any other cheque by a participating supermarket or other approved business. Paper checks have a major advantage to the maker over debit card transactions in that the maker's bank will release the money several days later. Paying with a check and making a deposit before it clears the maker's bank is called "kiting" and is generally illegal in the United States, but rarely enforced unless the maker uses multiple checking accounts with multiple institutions to increase the delay or to steal the funds. The decline of cheques Cheques have been in decline for many years, both for point of sale transactions (for which credit cards and debit cards are increasingly preferred) and for third party payments (e.g. bill payments), where the decline has been accelerated by the emergence of telephone banking and online banking. Being paper-based, cheques are costly for banks to process in comparison to electronic payments, so banks in many countries now discourage the use of cheques, either by charging for cheques or by making the alternatives more attractive to customers. In some European countries, cheques are now very rarely used, even for third party payments. In these countries, it is standard practice for businesses to publish their bank details on invoices in order to facilitate the receipt of payments. Even before the introduction of online banking, it has been possible in some countries to make payments to third parties using ATMs. One of the essential procedural differences is that with a cheque, the onus is on the payee to initiate the payment in the banking system, whereas with a bank transfer, the onus is on the payer to effect the payment. In Finland, banks stopped issuing personal cheques in about 1993. In Germany, cheques have almost completely vanished in favour of direct bank transfer and electronic payment. Direct bank transfer using socalled Giro accounts (current accounts) has been standard procedure since the 1950s to send and receive regular payments like rent and wages, even mail-order invoices. It is very common to allow the payee to automatically withdraw the requested amount from the payer's account (Lastschrifteinzug). Though similar to paying by cheque, the payee only needs the payer's bank and account number. Since the early 1990s this method of payment has also been available to merchants. Due to this, credit cards are rather uncommon in Germany and are mostly used for the credit function rather than for cashless payment. Acceptance of cheques has been further diminished since the late 1990s, because of the abolishment of the Eurocheque. In the United Kingdom and France, there is still a heavy reliance on cheques by some sectors of the population, partly because cheques remain free of charge to personal customers, but bank-to-bank transfers are increasing in popularity. Since 2001, businesses in the United Kingdom have made more electronic payments than cheque payments. In a bid to discourage cheques, most utilities in the United Kingdom charge higher prices to customers who choose to pay by a means other than direct debit, even if the customer pays by another electronic method. Many shops in France no longer accept cheques as a means of payment, and Shell announced in September 2005 that it would no longer accept cheques in its UK petrol stations. Cheques are now widely predicted to become a thing of the past in the United Kingdom. Despite being one of the world's most developed countries, the United States still relies heavily on cheques, caused by the absence of a high volume system for low value electronic payments. When sending a payment by online banking in the United States, the sending bank usually mails a cheque to the payee's bank rather than sending the funds electronically. This is changing rapidly, however, and certain companies with whom a person pays with a cheque will turn that check into an ACH or electronic transaction. Wire transfer A wire transfer is an electronic transfer of funds. Wire transfers can be done by a simple bank account transfer, or by a transfer of cash at a cash office. History: Wire transfers have been available since the advent of the telegraph, when the sender, at one bank, would communicate by telegraph (wire) the amount of money to be given to another person. Wire transfer companies:One of the largest companies that offers wire transfer is Western Union (minimum of 25, $15). Its wire transfer network has caused much controversy due to the anonymity of the service. Modern usage In modern times, the word wire transfer or bank transfer (sometimes combined as bank wire transfer) is used for domestic or international transactions where no cash or cheque exchange is involved, but the account balance is directly (electronically) transferred from one bank account to the other. A transfer might be done to support family back home, rescue travelers in unexpected emergencies, or to pay a business expense. Regulation Bank transfer is the most common payment method in Europe, with several million transactions done each day. While in 2002 the European Commission has regulated the fees banks may charge between Eurozone countries down to the domestic level international wire transfers can be quite expensive. Security features However, wire transfer, done bank-to-bank, is considered the safest international payment method. Both account holders must have a proven identity, and there is no possibility of a chargeback. Caution: risks in non-bank transfers Wire transfers done through cash offices, however, are usually unsafe and are not recommended for international trade. Cashier's check A cashier's check (also known as a treasurer's check, bank check, or teller's check) is a check issued by a bank on its own account for the amount paid to the bank by the purchaser with a named payee, and stating the name of the party purchasing the check (the remitter). The check is usually received as cash since it is guaranteed by the bank and does not depend on an account of a private individual or business. Cashier's checks are commonly used when payment must be credited immediately upon receipt for business, real estate transfers, tax payments and the like. Characteristics Cashier's checks feature the name of the issuing bank in a prominent location, usually the upper left-hand corner or upper center of the check. In addition, they are generally produced with enhanced security features, including watermarks, security thread, colorshifting ink, and special bond paper. These are designed to decrease the vulnerability to counterfeit items. In order to be recognized as a cashier's check, words to tha