Why have Banks?

Keeping Money Safe and Generating Wealth

Banks were originally financial institutions where people deposited their valuables to keep them safe. Today, banks offer a wide range of services.

What banks do lies at the heart of the financial markets. They use money deposited in them to generate interest for savers and make loans that benefit individuals and businesses. Hence the banking system acts to channel society's surplus wealth to individuals and organisations who can use it productively.

Collectively banks carry out a wide range of roles from personal finance to raising funds for governments and underwriting (guaranteeing) issues of bonds and shares. They are essential for businesses and the economy.


Main points about why we have Banks:

The term 'bank' now refers to any establishment licensed to accept deposits, pay interest, clear cheques, make loans and act as an intermediary in financial transactions. They also provide a range of other financial services to their customers.
Banks are places where individuals and organisations can store money which they don't wish to use at any given time. The money (and other precious items) can be stored more safely in banks than on their own premises.
Because of their access to this money, banks are therefore in a position to lend money to individuals and organisations that, for one reason or another, need to spend more money than they have access to at any given time.
The banks can thus use the money they care for to earn interest, which means that the money which individuals and organisations have deposited with them can be made to grow.
In this way, the banking system acts to channel society's surplus wealth to individuals and organisations that can use it productively.
Much of this wealth is used to make factories, machines, roads, airports, railways, shops and other economic assets, which help society as a whole to grow richer.
At the same time, it makes those who deposit their money with the banks become wealthier as well, and so encourages them to do so. Banks are therefore essential for economic growth.
Banks are also facilitators (they help make things happen). They play a vital role in helping governments and large corporations to raise funds by issuing bonds and shares in the capital markets. They offer advice and they underwrite the issues, which takes much of the risk out of them.
Banks also act as middle men in financial transactions, by providing short-term credit to enable large financial transactions to go through smoothly. This is a great help in keeping the wheels of commerce turning.
Banks also help companies manage their assets and make best use of money available for investment, often investing on their behalf. They also help companies trading internationally to bring their wealth into the country.
Central banks also play an important part in regulating the monetary supply to control inflation as well as ensuring financial stability throughout the financial system.
All these activities make banks essential. They use the huge amounts of money that they control to make even more money for their depositors and businesses. A stable, safe and secure banking system that functions properly and that organisations are confident to use is one of the key ingredients in a healthy and successful economy.

How did Banks Evolve?

Banks evolved because of the needs of society.

People have always needed a safe place to store their valuables and to borrow in times of shortage. The concepts of accepting deposits, making loans and paying interest to lenders were around in ancient times. There are references to bankers in all the major ancient civilisations, especially after metal coinage was developed in the 6th century BC.

In early medieval Europe, Christians were banned from charging interest on loans, so Jewish people pioneered many of today's banking practices. Later, Italian bankers came to dominate European banking due to the need to trade.

Such cities as Venice, Genoa and Florence were growing international trade centres; merchants carrying large amounts of coinage were tempting targets for thieves. As a result, the bankers developed the practice of issuing merchants with documents that, for example, enabled a merchant to deposit a large sum of florins with his bankers in Florence, and draw an equivalent sum of ducats out from the banker's agents in Venice.

This greatly facilitated international trade and led to a host of financial instruments evolving - bills of exchange, bankers drafts and, of course, cheques.

In the 17th and 18th centuries, the rising trading nations of Holland and Britain came to dominate the banking world. The need for money for wars, trade and the building of canals and other infrastructure led to the development of central banks, and the issuing and marketing of bonds.

The industrial revolution stimulated the rise of a truly comprehensive banking system and a network of domestic banks serving the business and personal needs of the emerging middle classes. In the 20th century, this came to be dominated by international banks controlling vast sums of money; they became so large and powerful that the entire global economy depended upon their stability.