What Is A Bank?

The word “bank” derives from the Latin for “bench” (banku), referring to the benches on which moneychangers sat in ancient Rome as they did business by swapping foreign coins for Roman ones. As well as exchanging money, they also lent it out – with interest.

Many consider that the first modern bank was founded in Amsterdam in 1609, although others soon arose along similar lines. Customers could deposit their cash with the bankers, who would place each person’s coins in a different box. Someone wanting to make a loan or pay a bill could simply ask the bankers to move the coins from their own box to the recipient’s box.

Of course, anyone engaging in this sort of activity soon becomes aware that physical movement is not necessary – a few figures can be altered on the paperwork and the transaction has happened. Banks also quickly realised that they could lend out the cash in their vaults, without the explicit permission of those who owned the money.

These two developments proved crucial for modern banking. Today, the banking industry involves unimaginable trillions of pounds zooming around the world. Most of that money only ever exists in the form of numbers on computer screens.

The side of banking with which most people are familiar is retail banking, also called commercial banking. This allows you to make deposits, receive your salary, pension or benefits, pay bills and so on. Retail banks also run savings accounts and provide loans. Banks make profits by charging higher interest on loans than they offer to savers.

As well as retail banks, there are investment banks or merchant banks. These underwrite the shares and bonds of private companies and charge considerable sums to advise them on mergers and sales. Investment banking is considered to be an even riskier activity than retail banking. Many banks have both retail and investment arms and are known as “universal” banks.