A bank is a financial institution licensed to accept deposits from the public and to use that money to make loans and investments. Most banks also run payment services: they hold customers' accounts, move money between them, issue cards and cheques, and connect customers to national and international payment systems. In law, the defining feature in most countries is deposit-taking: only an institution with a banking licence may take repayable money from the public, which is why "bank" is a protected word in many jurisdictions.
The everyday word covers several kinds of institution, including retail and commercial banks, investment banks, savings banks, cooperative banks, a building society or a credit union, and digital-only banks. A central bank is a different thing: it issues the currency and acts as the bank for the government and for other banks. Together, the licensed banks, the central bank and the systems that link them make up the banking system; the activity itself is described under banking.
Bank in plain terms
Picture a large shared safe in the middle of town. People leave their spare money in it and get a receipt. The safe-keeper notices that most people only come back for a small part of their money on any given day, so they lend some of it to a builder and a shopkeeper who need it, and charge them for the favour. Part of that charge is passed back to the savers as interest.
That is a bank in a sentence: it looks after money, lends it out, and keeps enough on hand to pay anyone who asks. The trust that everyone can get their money back is what makes it work, and also what makes it fragile if too many people ask at once.
What banks do
- Taking deposits. Banks accept bank deposits on current, savings and fixed-term accounts, and those balances are themselves money that people spend.
- Lending. Banks make loans and mortgages, offer an overdraft, and finance trade. When a bank lends, it typically creates a new deposit in the borrower's account, which is how most commercial bank money comes into being.
- Maturity transformation. Banks borrow short, through deposits that can be withdrawn at any time, and lend long, through loans repaid over years. This maturity transformation is useful to the economy but exposes the bank to liquidity risk.
- Payments. Banks run accounts, issue cards and send transfers, and they settle with each other through the central bank, often in a real-time gross settlement (RTGS) system. Cross-border payments go through correspondent banks.
- Other services. These include foreign exchange, safe custody, a safe deposit box, guarantees and investment products.
Licensing and regulation
Because banks hold the public's money and can create more of it, they are among the most tightly regulated businesses. A new bank must obtain a licence, often called a bank charter in the US, by showing adequate capital, fit and proper owners and managers, and sound systems. In the US a bank can be chartered nationally by the Office of the Comptroller of the Currency or by a state, giving federally chartered banks and state chartered banks. In the UK, accepting deposits is a regulated activity, with the Prudential Regulation Authority (PRA) supervising safety and soundness and the Financial Conduct Authority (FCA) supervising conduct. In the EU, a credit institution is defined as a firm whose business is taking deposits or other repayable funds from the public and granting credit on its own account.
Once licensed, banks must meet capital rules based on the international Basel framework, now Basel III, which set minimum levels of bank capital and liquidity. Many countries also run deposit insurance schemes to protect small savers, and the central bank stands ready as lender of last resort. Banks must also prevent money laundering under anti-money laundering (AML) laws.
Banks in Pakistan
In Pakistan, banking companies are licensed and supervised by the State Bank of Pakistan under the Banking Companies Ordinance, 1962. Banks included in the SBP's schedule of banks are known as scheduled banks; they include public sector, private, foreign, Islamic and specialised banks, with microfinance banks licensed under a separate framework. Several conventional banks also run an Islamic window offering Islamic banking products.
Risks and failures
Banks fail when losses wipe out their capital or when depositors lose confidence and withdraw money faster than the bank can raise it, a bank run. Banking crises such as the 2007–2009 global financial crisis showed how losses on loans like sub-prime mortgages can spread across the system. Non-bank lenders that do bank-like work without a banking licence are grouped under shadow banking, while a neobank may hold its own licence or work through a partner bank.