Assignment on Banking

Assignment On Banking Submitted By: Submitted to: Saurav Saha Badhan (Group Leader) Md. Khairul Basher Roll No : 091105 Majumder Suvro Banik (Avro) Lecturer Roll No : 091239 Department of Naboni Jerin AIS Roll No : 091183 (Accounting Information Rukshana Chowdhury System) Roll No : 091147 Md. Ahosan Habib Roll No : 091051 Submitted Date: 12-01-2010 th B.B.A 4 Batch Section - A What is Bank An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks. The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Jewish Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth. The definition of a bank varies from country to country. Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as: • conducting current accounts for his customers • paying cheques drawn on him, and • collecting cheques for his customers. "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). “A bank provides service activity and acts an intermediary between creditor and lender. In a broader sense, it is said that bank is the heart of complex financial structure”. - American Institute of Banking P.T.O. Overall, A bank is a financial organization licensed by a government. Its primary activities include providing financial services to customers while enriching its investors. Many financial activities were allowed over time. Evolution of Banking Banks have come a long way from the temples of the ancient world, but their basic business practices have not changed. Banks issue credit to people who need it, but demand interest on top of the repayment of the loan. Although history has altered the fine points of the business model, a bank's purpose is to make loans and protect depositors' money. Even if the future takes banks completely off your street corner and onto the internet or has you shopping for loans across the globe, the banks will still exist to perform this primary function. There are mainly four types of evolution on banking. They are- I. Ancient Era of Banking. II. During Late Antiquity and Middle Ages. III. Western Banking. IV. Global Banking. I. Ancient Era of Banking The first banks were probably the religious temples of the ancient world, and were probably established sometime during the third millennium B.C. Banks probably predated the invention of money. Deposits initially consisted of grain and later other goods including cattle, agricultural implements, and eventually precious metals such as gold, in the form of easy-to-carry compressed plates. Temples and palaces were the safest places to store gold as they were constantly attended and well built. Ancient Greece holds further evidence of P.T.O. banking. Greek temples, as well as private and civic entities, conducted financial transactions such as loans, deposits, currency exchange, and validation of coinage. Ancient Rome perfected the administrative aspect of banking and saw greater regulation of financial institutions and financial practices. Charging interest on loans and paying interest on deposits became more highly developed and competitive. During the reign of the Roman emperor Gallienus (260-268 AD), there was a temporary breakdown of the Roman banking system after the banks rejected the flakes of copper produced by his mints. Flipping the Coins Before the Money, we had to keep the coins in a safe place. Because ancient homes didn't have the benefit of a steel safe, most wealthy people held accounts at their temples. There are records from Greece, Rome, Egypt and Ancient Babylon that suggest temples loaned money out in addition to keeping it safe. Primus Bank, The First Bank The Romans, great builders and administrators in their own right, took banking out of the temples and formalized it within distinct buildings. Julius Caesar, in one of the edicts changing Roman law after his takeover, gives the first example of allowing bankers to confiscate land in lieu of loan payments. This was a monumental shift of power in the relationship of creditor and debtor, as landed noblemen were untouchable through most of history, passing debts off to descendants until either the creditor's or debtor's lineage died out. After the fall of Rome, banking was abandoned in Western Europe and did not revive until the time of the crusades. II. During Late Antiquity and Middle Ages Beginning around 1100s, the need to transfer large sums of money to finance the Crusades stimulated the re-emergence of banking in Western Europe. In 1156, in Genoa, occurred the earliest known foreign exchange contract. Europe also emerged in the 1100-1300 P.T.O. time frame as the beginning of Europe-wide banking, as their practice was to take in local currency, for which a demand note would be given that would be good at any of their castles across Europe, allowing movement of money without the usual risk of robbery while traveling. After 1400, political forces turned against the methods of the Italian free enterprise bankers. In 1401, King Martin I of Aragon expelled them. In 1403, Henry IV of England prohibited them from taking profits in any way in his kingdom. In 1409, Flanders imprisoned and then expelled Genoese bankers. In 1410, all Italian merchants were expelled from Paris. In 1401, the Bank of Barcelona was founded. In 1407, the Bank of Saint George was founded in Genoa. Eventually, the various monarchs that reigned over Europe noted the strengths of banking institutions. As banks existed by the grace, and occasionally explicit charters and contracts, of the ruling sovereign, the royal powers began to take loans to make up for hard times at the royal treasury - often on the king's terms. This easy finance led kings into unnecessary extravagances, costly wars and an arms race with neighboring kingdoms that lead to crushing debt. In 1557, Phillip II of Spain managed to burden his kingdom with so much debt as the result of several pointless wars that he caused the world's first national bankruptcy - as well as the second, third and fourth, in rapid succession. This occurred because 40% of the country's gross national product (GNP) was going toward servicing the debt. III. Western Banking Banking was already well established in the British Empire when Adam Smith came along in 1776 with his "invisible hand" theory. Empowered by his views of a self-regulated economy, moneylenders and bankers managed to limit the state's involvement in the banking sector and the economy as a whole. Capitalism Around the time of Adam Smith (1776) there was a massive growth in P.T.O. the banking industry. Within the new system of ownership and investment, the state's role as an economic factor changed substantially. This free market capitalism and competitive banking found fertile ground in the New World where the United States of America was getting ready to emerge. In the beginning, Smith's ideas did not benefit the American banking industry. The average life for an American bank was five years, after which most bank notes from the defaulted banks became worthless. Alexander Hamilton, the secretary of the Treasury, established a national bank that would accept member bank notes at par, thus floating banks through difficult times. This national bank, after a few stops, starts, cancellations and resurrections, created a uniform national currency and set up a system by which national banks backed their notes by purchasing Treasury securities - thus creating a liquid market. Merchant Banks Because the national banking system was so sporadic, most of the economic duties that would have been handled by it, in addition to regular banking business like loans and corporate finance, fell into the hands of large merchant banks. At that time, a bank was under no legal obligation to disclose its capital reserve amounts - an indication of its ability to survive large, above-average loan losses. This mysterious practice meant that a bank's reputation and history mattered more than anything. While upstart banks came and went, these family-held merchant banks had long histories of successful transactions. Morgan and Monopoly J.P. Morgan & Company emerged at the head of the merchant banks during the late 1800s. Although the dawn of the 1900s had well- established merchant banks, it was difficult for the average American to get loans from them. These banks didn't advertise and they rarely extended credit to the "common" people. The collapse in shares of a copper trust set off a panic that had people rushing to pull their money out of banks and investments. This caused shares to plummet. P.T.O . Ironically, this show of supreme power in saving the U.S. economy ensured that no private banker would ever again wield that power. The fact that it took J.P. Morgan, a banker who was disliked by much of America for being one of the robber barons with Carnegie and Rockefeller, to do the job prompted the government to form the Federal Reserve Bank, commonly referred to today as the Fed, in 1913. The End of an Era Even with the establishment of the Federal Reserve, financial power, and residual political power, was concentrated in Wall Street.

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