Learning Objectives:

  • Define banking and explain its core functions.

  • Trace the historical evolution of banking from ancient times to the modern era.

  • Understand the key milestones in banking development, particularly in the US and Europe.

  • Explain the difference between commercial banking, investment banking, and central banking.

1.1 Defining Banking and Its Core Functions

A bank is a financial institution licensed to receive deposits and make loans. Commercial banks are the most common type of bank and the primary intermediary between savers who deposit money and borrowers who need capital. The BUSN 1180 course at Minnesota State College requires students to understand “bank products and services” and “the bank operations process” as foundational learning outcomes .

The core functions of banks include:

Accepting Deposits: Banks take in funds from individuals and businesses through checking accounts, savings accounts, money market accounts, and certificates of deposit. This is the primary source of bank funding and the foundation of the banking relationship.

Making Loans: Banks deploy deposited funds by lending to consumers, businesses, and governments. Mortgage loans, auto loans, personal loans, and commercial loans are all common products.

Payment Processing: Commercial banks facilitate the movement of money through cheques, wire transfers, ACH payments, and debit card networks.

Credit Products: Banks issue credit cards and lines of credit that allow customers to borrow on a revolving basis.

Treasury and Investment Services: Larger commercial banks offer foreign exchange, treasury management, and investment products to business clients.

The University of Surrey course provides a comprehensive framework for understanding these functions, requiring students to “understand how modern banks are managed and the risks they face” .

1.2 Historical Evolution of Banking

The history of banking can be traced to ancient civilisations. The BUSN 1180 course requires competency in “banking–history and evolution” as a learning outcome .

Ancient Origins: Temples in Mesopotamia and Greece served as early repositories for valuables, providing safekeeping services for grain, precious metals, and other assets.

Medieval Banking: Italian city-states like Florence and Venice developed sophisticated banking practices, including bills of exchange, double-entry bookkeeping, and letters of credit. The Medici family established a network of banks across Europe, pioneering branch banking.

The Rise of Modern Banking: The Bank of England (1694) and the First Bank of the United States (1791) established the foundation for modern central and commercial banking. These institutions introduced the concept of a central bank with the power to issue currency and manage the money supply.

The 19th Century: The development of joint-stock banking, limited liability, and branch banking transformed banking from small, private partnerships to large, publicly traded corporations. The National Bank Act (1863) created a system of nationally chartered banks in the US and established the Office of the Comptroller of the Currency (OCC).

The 20th Century: The Federal Reserve System (1913) was established to provide the US with a central bank and a more stable financial system. The Banking Act of 1933 (Glass-Steagall) separated commercial and investment banking, a distinction that was largely repealed by the Gramm-Leach-Bliley Act of 1999.

The 21st Century: The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) was enacted in response to the 2008 financial crisis, establishing the Consumer Financial Protection Bureau (CFPB) and introducing the Volcker Rule to restrict proprietary trading.

1.3 Evolution of Banking Legislation

The University of Sussex module covers “banking activities and the type of banking” and “bank regulation and supervision” as core topics . Key legislation includes:

United States:

  • The National Bank Act (1863): Created a system of nationally chartered banks and established the OCC.

  • The Federal Reserve Act (1913): Established the Federal Reserve System as the central bank of the United States.

  • The Banking Act of 1933 (Glass-Steagall): Separated commercial and investment banking.

  • The Bank Secrecy Act (1970): Established requirements for recordkeeping and reporting of certain financial transactions.

  • The Gramm-Leach-Bliley Act (1999): Repealed the Glass-Steagall separation between commercial and investment banking.

  • The Sarbanes-Oxley Act (2002): Established stricter corporate governance and financial reporting requirements.

  • The Dodd-Frank Act (2010): Established the CFPB and introduced the Volcker Rule.

Europe:

  • The establishment of the European Banking Authority (2011) to develop regulatory technical standards and promote supervisory convergence.

  • The implementation of the Basel Accords through the Capital Requirements Regulation (CRR) and Directive (CRD IV).

  • The Markets in Financial Instruments Directive (MiFID II) to regulate investment services and markets.

1.4 Evolution of the Financial System and Modern Banking

The course notes that “financial markets are changing rapidly, and new financial instruments appear almost daily. The once staid financial industry has become highly dynamic” . The boundaries between commercial and investment banks are disappearing, and competition in the financial sector is becoming global . The 2008 financial crisis “illuminated the most weak points in regulation, accounting, risks analysis, and other aspects of banking” .

 

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