Question

Explain in detail the evolution of the banking industry and how initial practices of their founders still persist today?

Answer 1

Question:- Explain in detail the evolution of the banking industry and how initial practices of their founders still persist today?

Solution:-

History of Banking Industry:-The history of banking began with the first prototype banks which were the merchants of the world, who gave grain loans to farmers and traders who carried goods between cities. This was around 2000 BC in Assyria, India and Sumeria. Later, in ancient Greece and during the Roman Empire, lenders based in temples gave loans, while accepting deposits and performing the change of money. Archaeology from this period in ancient China and India also shows evidence of money lending. Many histories position the crucial historical development of a banking system to medieval and Renaissance Italy and particularly the affluent cities of Florence, Venice and Genoa. The Bardi and Peruzzi Families dominated banking in 14th century Florence, establishing branches in many other parts of Europe.The most famous Italian bank was the Medici bank, established by Giovanni Medici in 1397. The oldest bank still in existence is Banca Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472. Development of banking spread from northern Italy throughout the Holy Roman Empire, and in the 15th and 16th century to northern Europe. This was followed by a number of important innovations that took place in Amsterdam during the Dutch Republic in the 17th century, and in London since the 18th century. During the 20th century, developments in telecommunications and computing caused major changes to banks' operations and let banks dramatically increase in size and geographic spread. The financial crisis of 2007–2008 caused many bank failures, including some of the world's largest banks, and provoked much debate about bank regulation.

The First Actual Bank:-The Romans great builders and administrators in their own right took banking out of the temples and formalized it within distinct buildings. During this time, money lenders still profited, as loan sharks do today, but most legitimate commerce and almost all governmental spending involved the use of an institutional bank. 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 or debtor's lineage died out.

Visa Royal:-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 sovereignty, the royal powers began to take loans to make up for hard times at the royal treasury, often on the king's terms. These easy finance led kings into unnecessary extravagances, costly wars, and an arms race with neighboring kingdoms that would often lead to crushing debt.

Adam Smith and Modern 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.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 banknotes from the defaulted banks became worthless. These state-chartered banks could, after all, only issue bank notes against gold and silver coins they had in reserve. A bank robbery meant a lot more then than it does now, in our age of deposit insurance and the Federal Deposit Insurance Corporation. Compounding these risks was the cyclical cash crunch in America.

Merchant Banks:-Most of the economic duties that would have been handled by the national banking system, in addition to regular banking business like loans and corporate finance, fell into the hands of large merchant banks, because the national banking system was so sporadic. During this period of unrest that lasted until the 1920s, these merchant banks parlayed their international connections into both political and financial power. These banks included Goldman and Sachs, Kuhn, Loeb, and J.P. Morgan and Company. Originally, they relied heavily on commissions from foreign bond sales from Europe, with a small back-flow of American bonds trading in Europe. This allowed them to build up their capital. At that time, a bank was under no legal obligation to disclose its capital reserve amount, 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. As large industry emerged and created the need for corporate finance, the amounts of capital required could not be provided by anyone bank, and so initial public offerings (IPOs) and bond offerings to the public became the only way to raise the needed capital.

The Panic of 1907:-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, which caused shares to plummet. Without the Federal Reserve Bank to take action to calm people down, the task fell to J.P. Morgan to stop the panic, by using his considerable clout to gather all the major players on Wall Street to maneuver the credit and capital they controlled, just as the Fed would do today.

World War II Saves the Day:-World War II may have saved the banking industry from complete destruction. WWII and the industriousness it generated lifted the U.S. and world economies back out of the downward spiral. For the banks and the Federal Reserve, the war required financial maneuvers using billions of dollars. This massive financing operation created companies with huge credit needs that, in turn, spurred banks into mergers to meet the new needs. These huge banks spanned global markets. More importantly, domestic banking in the U.S. had finally settled to the point where, with the advent of deposit insurance and mortgages, an individual would have reasonable access to credit.

With the exception of the extremely wealthy, very few people buy their homes in all cash transactions. Most of us need a mortgage, or some form of credit, to make such a large purchase. In fact, many people use credit in the form of credit cards to pay for everyday items. The world as we know it would not run quite so smoothly without credit or without banks to issue credit. Banks have come a long way from the temples of the ancient world, but their basic business practices have not changed. Banks issue credit or loans to people who need it, but they 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 have you shopping for loans across the globe banks will still exist to perform this primary function.