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Tutorial on Bank

Which is the Central Bank of India?
Reserve Bank of India, the Central Bank of the country, is at the center of the Indian Financial and Monetary system. RBI is an Institution of recent vintage as compared to some of its counterparts in developed countries like US, UK, Sweden and Germany. However, among the developing countries it is the oldest. It was inaugurated on April 1, 1935 as a private shareholders' institution under the Reserve Bank of India Act 1934. It was nationalised in January 1949, under the Reserve Bank (Transfer to Public Ownership) of India Act, 1948. This act empowers the central government, in consultation with the Governor of the Bank, to issue such directions to RBI as might be considered necessary in the public interest . RBI is governed by a Central Board of Directors with 20 members consisting of the Governor and the Deputy Governors. The Governor and the deputy Governors of the Bank are Government of India appointees.

What are the functions of the Reserve Bank of India?
The main functions of the Reserve Bank of India are to:
· Maintain financial stability and enable the growth of sound Financial Institutions. This should, in turn, enable monetary stability and allow economic units to carry out their business with confidence.
· Maintain monetary stability for the business and economic life towards growth and proper functioning of a mixed economic system in the country.
· Maintain a stable payments and currency system and facilitate safe and efficient execution of financial transactions.
· Promote a stable financial structure of markets and systems and help it to operate with optimum efficiency
· Regulate the money and credit supply in the economy to help maintain price stability to a reasonable extent.
· Ensure credit allocation in line with national economic priorities.

What do we mean by International Banking?
The expansion of trade in recent decades has been paralleled by the growth of multinational banking. Banks have historically financed international trade, but a notable recent development has been the expansion of branches and subsidiaries that are physically located abroad, as well as the increased volume of loans to foreign borrowers. In 1960 only eight U.S. banks had foreign offices with a total of 131 branches. By 1998 about 82 U.S. banks had about 935 foreign branches.

Similarly, the number of foreign banks with offices in the United States has increased dramatically. In 1975, 79 foreign banks were chartered in the United States, accounting for 5 percent of U.S. bank assets. In 1998, 243 foreign banks had U.S. offices, accounting for 23 percent of U.S. bank assets. Most of these banks are business-oriented banks, but some have also engaged in retail banking. In 1978 the U.S. Congress passed the International Banking Act, which imposed constraints on the activities of foreign banks in the United States, removing some of the advantages they had acquired in relation to U.S. banks.

As banks make more international loans, many experts believe that there must be greater international cooperation regarding standards and regulations to lower the risk of bank failure and international financial collapse. In 1988 the Basel Committee on Banking Supervision, an international organization of bank regulators based in Basel, Switzerland, took the first steps in this direction with the Basel Capital Accord. The accord established a global standard for assessing the financial soundness of banks and required banks to maintain a minimum ratio of capital to risky assets. Many banking experts believe this accord became the primary tool for strengthening the safety of international banking. The accord was eventually adopted by 100 countries. In 2001 the Basel Committee recommended a new set of regulations known as the New Basel Capital Accord to replace the 1988 agreement.

How is Banking done worldwide?
A Canada
Because of Canada's close historical relationship with the United States and the United Kingdom, development of the Canadian banking system has been influenced by both countries. Unlike the United States, however, Canada always had a branch-banking system. Until 1994 banks in the United States were restricted to opening branches only in the city or state where they were incorporated. One of the first laws passed by Canada's Parliament after confederation, in 1867, allowed any Canadian-chartered bank to operate in any part of the dominion. This law encouraged the growth of Canada's branch-banking system, in which a few large banks operate all the country's banking offices. In 2000 there were only 13 domestic banks in Canada, and the six largest controlled more than 90 percent of all bank assets in Canada. The remaining seven domestic banks accounted for about 2 percent of bank assets, and foreign banks accounted for about 7 percent of bank assets.

The largest commercial banks of Canada operate extensively in foreign countries, particularly in the West Indies, Asia, and the United States. In addition to the usual business of commercial loans, Canadian banks operating in foreign countries have specialized in investment banking and wealth-management activities.

The regulator of federally chartered Canadian banks and financial institutions is the Office of the Superintendent of Financial Institutions (OSFI), which was established in 1987. Since 1967 deposit insurance has been provided by the Canada Deposit Insurance Corporation (CBIC), which insures up to $60,000 Canadian per depositor per institution. Both the OSFI and the CBIC are Crown Corporations owned by the government.

The central bank of Canada is the Bank of Canada. Created in 1935, it is owned by the Ministry of Finance and is responsible for Canadian monetary policy. Unlike the U.S. Federal Reserve, the Bank of Canada is also responsible for issuing and managing the national debt. In the United States, this function is performed by the Department of the Treasury. The primary policy group of the Bank of Canada is called the Governing Council. This group consists of the governor of the Bank of Canada, the senior deputy governor, and four deputy governors. The Bank of Canada is less independent of the government than is the U.S. Federal Reserve because it must consult with the minister of finance on policy matters.

B The European Continent
Until recently, European banking was very different from banking in the United States. European banks were frequently owned by the government and could engage in activities that were prohibited to banks in the United States. Most of these prohibited activities involved investment banking such as security underwriting (selling a firm's stock or bonds at a guaranteed price) or security placement (finding buyers for a firm's stock or bonds). These services are important to businesses and being able to provide them gave European banks an advantage over U.S. banks. These differences are rapidly disappearing. Most European banks are now privately owned and recent U.S. legislation has allowed U.S. banks to engage in investment-banking activities through the bank holding company form of organization.

Two differences remain between U.S. and European banking. The first is that many European banks can own nonbank commercial and industrial businesses. Such ownership is still prohibited, for the most part, for U.S. banks and holding companies. As a result, banks in Europe tend to be more business oriented and much more involved with corporate governance (corporate decision-making) than their U.S. counterparts. This also explains why most European companies rely more heavily on bank loans to finance their activities than do U.S. companies which rely more on funds raised by selling stocks and bonds in financial markets.

The second difference is that banking is much more concentrated in Europe. In other words, banking markets are dominated by a few large banks whereas in the United States many banks compete for a customer's deposits and loans. This stems from the fact that European countries have had very liberal branching laws allowing banks to have extensive deposit-gathering networks in their home country and also from the fact that most European countries are not as concerned about monopolies as are U.S. regulators. It is not clear how long this difference will last, however, as legislation in the United States in 1994 allowed banks to establish banks and branches in other states.

The establishment of the Economic and Monetary Union (EMU) in 1992 created a new banking system in Europe that parallels that of the United States in many ways. The EMU created a new European Central Bank (ECB) that will coordinate monetary policy throughout most of continental Europe. It also established a uniform currency in Europe called the euro that beginning in 2002 was the currency used throughout Western Europe, except in Denmark, Sweden, and the United Kingdom. The EMU also allowed banks to branch throughout Europe and not just in their home country.

C United Kingdom
Since the 17th century Britain has been known for its prominence in banking. The capital, London, still remains a major financial center, and virtually all the world's leading commercial banks are represented there.

Aside from the central Bank of England, which was incorporated, early English banks were privately owned rather than stock-issuing firms. Bank failures were common; so in the early 19th century, stock-issuing banks, with a larger capital base, were encouraged as a means of stabilizing the industry. By 1833 these corporate banks were permitted to accept and transfer deposits in London, although they were prohibited from issuing money, a prerogative monopolized by the Bank of England. Corporate banking flourished after legislation in 1858 approved limited liability for stock-issuing banks. The banking system, however, failed to preserve the large number of institutions typical of U.S. banking. At the turn of the 20th century, a wave of bank mergers reduced both the number of private and stock-issuing banks.

The present structure of British commercial banking was substantially in place by the 1930s, with the Bank of England, then privately owned, at the apex, and 11 London clearing banks ranked below the Bank of England. Clearing banks sort and then forward checks to the bank from which they were originally drawn for payment. Two changes have occurred since then: The Bank of England was nationalized (became government-owned) in 1946 by the postwar Labour government; and in 1968 a merger among the largest five clearing banks left the industry in the hands of four: Barclays, Lloyds (now Lloyds TSB Group), Midland (now part of HSBC Holdings), and National Westminster (taken over by the Royal Bank of Scotland in 2000).

The larger clearing banks, with their national branch networks, dominate British banking. They are the key links in the transfer of business payments through the checking system, as well as the primary source of short-term business finance. Moreover, through their ownership and control over subsidiaries, the big British banks influence other financial markets such as consumer and housing finance and merchant banking. The dominance of the clearing banks was challenged in recent years by the rise of "parallel markets," encompassing financial activities by smaller banking houses, building societies (banking institutions similar to SLAs in the United States), and other financial concerns, as well as local government authorities. The major banks responded to this competition by offering new services and competitive terms.

A restructuring in the banking industry took place in the late 1970s. The Banking Act of 1979 formalized Bank of England control over the British banking system, which was previously supervised on an informal basis. Only institutions approved by the Bank of England as "recognized banks" or "licensed deposit-taking institutions" are permitted to accept deposits from the public. The act also extended Bank of England control over the new financial intermediaries that have flourished since 1960.

D Developing Countries
The type of national economic system that characterizes developing countries plays a crucial role in determining the nature of the banking system in those countries. In capitalist countries a system of private enterprise in banking prevails. In state-managed economies, banks have been nationalized. Other countries have patterned themselves after the social-democracies of Europe; in Egypt, Peru, and Kenya, for instance, government-owned and privately owned banks coexist. In many countries, the banking system developed under colonialism, with banks owned by institutions in the parent country. In some, such as Zambia and Cameroon, this heritage continued, although modified, after decolonization. In other nations, such as Nigeria and Saudi Arabia, the rise of nationalism led to mandates for majority ownership by the indigenous population.

Banks in developing countries are similar to their counterparts in developed nations. Commercial banks accept and transfer deposits and are active lenders, especially for short-term purposes. Other financial intermediaries, particularly government-owned development banks, arrange long-term loans. Banks are often used to finance government expenditures. The banking system may also play a major role in financing exports.

Updated till 27-May-2004