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.[2]
Whereas 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).
Gradually the goldsmiths began to lend money out on behalf of the depositor, and promissory
notes (which evolved into banknotes) were issued for money deposited as a loan to the
goldsmith. Thus by the 19th century, we find in ordinary cases of deposits of money with
banking corporations, or bankers, the transaction amounts to a mere loan or mutuum, and the
bank is to restore, not the same money, but an equivalent sum, whenever it is demanded[11]
and money, when paid into a bank, ceases altogether to be the money of the principal (see
Parker v. Marchant, 1 Phillips 360); it is then the money of the banker, who is bound to return
an equivalent by paying a similar sum to that deposited with him when he is asked for it. [12]
The goldsmith paid interest on deposits. Since the promissory notes were payable on demand,
and the advances (loans) to the goldsmith's customers were repayable over a longer time-
period, this was an early form of fractional reserve banking. The promissory notes developed
into an assignable instrument which could circulate as a safe and convenient form of
money[13] backed by the goldsmith's promise to pay,[14][need quotation to verify] allowing goldsmiths to
advance loans with little risk of default.[15][need quotation to verify] Thus the goldsmiths of London
became the forerunners of banking by creating new money based on credit.
Interior of the Helsinki Branch of the Vyborg-Bank [fi] in the 1910s
The Bank of England originated the permanent issue of banknotes in 1695.[16] The Royal
Bank of Scotland established the first overdraft facility in 1728.[17] By the beginning of the
19th century Lubbock's Bank had established a bankers' clearing house in London to allow
multiple banks to clear transactions. The Rothschilds pioneered international finance on a
large scale,[18][19] financing the purchase of shares in the Suez canal for the British government
in 1875
