A bank is an institution which collects surplus funds from the general public, safeguards them and makes them available to the true owner when required, but also loans out funds to those who are in need of them and can provide security.
The Basic Function of Banking
(i) The lending of money, based on any surpluses available, to other customers who are in need of funds, in return for interest and collateral security. The interest is shared between the bank and the true owner.
The English Banking System
In the Banking Act of 1979 English banking has been regulated in a tripartite system: –
(i) The Bank of England, a ‘State Bank,’ or “National Bank.’
(ii) ‘Recognised banks’ may use the work ‘bank’ in their names and advertising.
(iii) Licensed deposit takers. These institutions may not describe themselves as banks, but can offer financial services of many sorts.
The banking institutions have had to submit applications for recognition as Recognised banks,’ members of group above. They are now listed as ‘eligible banks’ whose bills are eligible for discount at the Bank of England. A first list has been published and other institutions have been classified as deposit-taking institutions.
Commercial or Joint-Stock Banks
In the eighteenth century the banking system developed as a means of providing the capital for the agricultural and industrial revolutions. Not only goldsmiths, but merchants, landowners, and other well-to-do people practised banking as sideline and gradually developed the necessary expert knowledge.
Since a single banker was limited by his personal capital, the idea of partnerships in banking was adopted from and early date, and hence the name Joint-Stick Banks. It soon became clear that a bank that was too small and localized in its connections was likely to go bankrupt if hard times hit that particular area. For instance, banks in farming areas that were severely hit by floods might be bankrupted if all the depositors withdrew their funds at the same time to replace cattle, machinery, and fencing lost in the flood.
This led to the amalgamation of banks in different localities to give a broader base to the bank. The advantages of amalgamations, both with regard to the stability of the banking system and economical operation in other ways has reduced the number of banks over the years, so that by the 1920’s England had only the “Big Five’ and six smaller banks.
In recent years further amalgamations have occurred. Two of the “Big five,’ Westminster and National Provincial, have merged with Couths and Co., and District to form the National Westminster Group. Another, Barclays, has merged with Martins: and the remaining three smaller banks, Glyn Mills, National and Williams Deacon’s, have formed the National and Commercial Banking Group.
Midland and Lloyds are the other big banks. These eleven banks were one called the Clearing Banks, because together, and in co-operation with the Bank of England, they operated the Bankers’ Clearing House. There are now six chief Clearing Banks.