Student: Sarkhan Taghiyev, Osman Mammadov

Subject: Importance of Banking System to The Economy

Teacher: Ahliman Abbasov

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 İmportance of Banking System to The Economy
A bank is a financial institution that accepts deposits from the public and creates a
demand deposit while simultaneously making loans. Lending activities can be directly
performed by the bank or indirectly through capital markets.
Because banks play an important role in financial stability and the economy of a
country, most jurisdictions exercise a high degree of regulation over banks. Most
countries have institutionalised a system known as fractional reserve banking, under
which banks hold liquid assets equal to only a portion of their current liabilities. In
addition to other regulations intended to ensure liquidity, banks are generally subject to
minimum capital requirements based on an international set of capital standards, the
Basel Accords.
Banking in its modern sense evolved in the fourteenth century in the prosperous
cities of Renaissance Italy but in many ways functioned as a continuation of ideas and
concepts of credit and lending that had their roots in the ancient world.
In the history of banking, a number of banking dynasties – notably, the Medicis,
the Fuggers, the Welsers, the Berenbergs, and the Rothschilds – have played a central
role over many centuries. The oldest existing retail bank is Banca Monte dei Paschi di
Siena (founded in 1472), while the oldest existing merchant bank is Berenberg Bank
(founded in 1590).
Ancient
The concept of banking may have begun in the times of ancient Assyria and
Babylonia with merchants offering loans of grain as collateral within a barter system.
Lenders in ancient Greece and during the Roman Empire added two important
innovations: they accepted deposits and changed money.
Medieval
The present era of banking can be traced to medieval and early Renaissance Italy,
to the rich cities in the centre and north like Florence, Lucca, Siena, Venice and Genoa.
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The Bardi and Peruzzi families dominated banking in 14th-century Florence,
establishing branches in many other parts of Europe. Giovanni di Bicci de' Medici set
up one of the most famous Italian banks, the Medici Bank, in 1397. The Republic of
Genoa founded the earliest-known state deposit bank, Banco di San Giorgio (Bank of
St. George), in 1407 at Genoa, Italy.
Early modern
Fractional reserve banking and the issue of banknotes emerged in the 17th and
18th centuries. Merchants started to store their gold with the goldsmiths of London, who
possessed private vaults, and who charged a fee for that service. In exchange for each
deposit of precious metal, the goldsmiths issued receipts certifying the quantity and
purity of the metal they held as a bailee; these receipts could not be assigned, only the
original depositor could collect the stored goods.
Gradually the goldsmiths began to lend money out on behalf of the depositor, and
promissory notes (which evolved into banknotes) were issued for money deposited as a
loan to the goldsmith. Thus by the 19th century we find "[i]n ordinary cases of deposits
of money with banking corporations, or bankers, the transaction amounts to a mere loan
or mutuum, and the bank is to restore, not the same money, but an equivalent sum,
whenever it is demanded".
The goldsmith paid interest on deposits. Since the promissory notes were payable
on demand, and the advances (loans) to the goldsmith's customers were repayable over
a longer time-period, this was an early form of fractional reserve banking. The
promissory notes developed into an assignable instrument which could circulate as a
safe and convenient form of money backed by the goldsmith's promise to pay, allowing
goldsmiths to advance loans with little risk of default. Thus the goldsmiths of London
became the forerunners of banking by creating new money based on credit.
The Bank of England originated the permanent issue of banknotes in 1695. The
Royal Bank of Scotland established the first overdraft facility in 1728. By the beginning
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of the 19th century Lubbock's Bank had established a bankers' clearing house in London
to allow multiple banks to clear transactions.
The Rothschilds pioneered international finance on a large scale, financing the
purchase of shares in the Suez canal for the British government in 1875. The definition
of a bank varies from country to country. See the relevant country pages for more
information.
Under English common law, a banker is defined as a person who carries on the
business of banking by conducting current accounts for their customers, paying cheques
drawn on them and also collecting cheques for their customers.
In most common law jurisdictions there is a Bills of Exchange Act that codifies the
law in relation to negotiable instruments, including cheques, and this Act contains a
statutory definition of the term banker: banker includes a body of persons, whether
incorporated or not, who carry on the business of banking' (Section 2, Interpretation).
Although this definition seems circular, it is actually functional, because it ensures that
the legal basis for bank transactions such as cheques does not depend on how the bank
is structured or regulated.
The business of banking is in many common law countries not defined by statute
but by common law, the definition above. In other English common law jurisdictions
there are statutory definitions of the business of banking or banking business.
When looking at these definitions it is important to keep in mind that they are
defining the business of banking for the purposes of the legislation, and not necessarily
in general. In particular, most of the definitions are from legislation that has the purpose
of regulating and supervising banks rather than regulating the actual business of
banking. However, in many cases, the statutory definition closely mirrors the common
law one. Examples of statutory definitions:
• "banking business" means the business of receiving money on current or
deposit account, paying and collecting cheques drawn by or paid in by customers, the
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making of advances to customers, and includes such other business as the Authority
may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2,
Interpretation).
• "banking business" means the business of either or both of the following:
1. receiving from the general public money on current, deposit, savings or other
similar account repayable on demand or within less than [3 months] ... or with a period
of call or notice of less than that period;
2. paying or collecting cheques drawn by or paid in by customers.
Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct
credit, direct debit and internet banking, the cheque has lost its primacy in most banking
systems as a payment instrument. This has led legal theorists to suggest that the cheque
based definition should be broadened to include financial institutions that conduct
current accounts for customers and enable customers to pay and be paid by third parties,
even if they do not pay and collect cheques .
The World Bank is one of the largest donor organizations in the world, serving the
goals of global economic development and ensuring the distribution of financial
resources. It was founded on July 1, 1944 at the Bretton Woods Conference. The World
Bank is not a bank in the classical sense , but a specialized agency. It is one of the
specialized agencies of the United Nations ( UN ). Founded by the United Nations, the
agency currently has 184 members.
Member countries monitor the activities of this body. The World Bank provides
long-term loans and grants to developing countries at very low interest rates or without
interest. The World Bank is also cooperating with the Azerbaijani government to
implement structural reforms.
The Bank's main goal is to help poor countries implement structural reforms and
reduce poverty. The World Bank uses its financial resources, highly qualified staff and

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knowledge base to achieve sustainable and sustainable development in individual
countries.
The original purpose of the bank was established during the Second World
Warimplementation and financing of reconstruction work in the devastated countries.
There are many features that distinguish this bank from other banks. No one can open
an account in this bank. The clients of this bank are only states.
The World Bank has an invaluable role in the development of the world economy
and many other socio-cultural spheres. As its name suggests, the World Bank is the
world's main central bank. Thus, the World Bank regulates the banking sector of the
world, ie it periodically provides banks with information and advice. The main focus of
the World Bank's activities is to provide loans to developing countries and poor
countries in economic transition and to reduce poverty, as well as to ensure the
development of member states.
The banking system is a set of banks, non-bank institutions and banking
infrastructure that are closely interconnected and ensure sustainable development.
The classification of banking systems can be based on various criteria.
Depending on the type of banking relationship, distribution, transition and market
banking systems can be distinguished. The market-type system is characterized by
competition and regulation, the distribution-type system is characterized by a lack of
market elements, strict regulation and centralization. The transitional banking system
combines the features of both market and distribution systems (competition and
regulation).
In addition, the levels of banking systems operate on the basis of the type of
system (distribution or market). In practice, one-, two- and three-tier systems are
encountered.

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 By classifying banking systems according to models, we can distinguish between
competitive, oligopolistic and monopolistic models. By classes - national, supranational
and world banking systems.
There are universal and specialized types of banking systems by specialization. It
is forbidden to combine credit and investment activities in the specialized model. The
universal model of the banking system, on the contrary, allows combining lending and
investment.
Depending on the level of development of the banking system, the following can
be found in practice:
Extensive model. It is characterized by a limited number of banking services,
aggressive policy in the market of assets and liabilities, low degree of diversification,
high concentration of risks, level of competition and market discipline;
Intensive model. It is characterized by a high level of competition, high
transparency and market discipline, the availability of expanded modern infrastructure,
a high level of bank capitalization, balanced business and the reliability of information
provided to regulators.
The banking sector is a major segment of the U.S. and world economies. While
some might define it more broadly, the U.S. Department of Commerce considers it a
subsector of the larger financial services industry, which also includes subsectors
focusing on asset management, insurance, venture capital, and private equity.
The U.S. banking system alone had $17.9 trillion in assets and a net income of
$236.8 billion as of the end of 2018, the Commerce Department notes, and “supports
the world’s largest economy with the greatest diversity in banking institutions and
concentration of private credit anywhere in the world.”
Holding financial assets is at the core of all banking, and where it began in ancient
times—though it has expanded far beyond the days of storing gold coins for wealthy
patrons. At the most basic level, a bank takes deposits from individuals or businesses,
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with the promise that the money can be withdrawn when the depositor wants it (though
sometimes with a penalty for early withdrawal). Depending on the type of account, the
bank also may pay interest on the depositor’s money.
The bank then lends the money it has on deposit to other individuals and
businesses and receives interest payments from the borrower in return. Banks make a
profit on the difference between the interest rate that they pay depositors for the use of
their money and the higher interest rate that they charge borrowers.
By law, banks cannot lend out all of the money in their possession, but are required
by regulators to keep a certain amount of capital in reserve to cover withdrawals and
other needs. The rules change from time to time and vary by the size of the bank, but
many large U.S. banks recently were required to keep 8% of their capital in reserve.
In addition to making loans, banks can invest their own money in other kinds of
assets, such as government securities.
How Do Banks Drive the Economy?
The banking sector is crucial to the modern economy. As the primary supplier of
credit, it provides money for people to buy cars and homes and for businesses to buy
equipment, expand their operations, and meet their payrolls.
Banks also provide depositors with a safe place to keep their money (particularly
since the advent of the Federal Deposit Insurance Corp. (FDIC), which insures many
accounts up to certain limits) as well as to earn some interest on it.
The credit cards, debit cards, and checking accounts that banks make available
facilitate all kinds of everyday transactions. They also help drive ecommerce, where
cash is of little use.
The banking sector is also a major employer. In 2020, for example, FDIC-insured
commercial banks alone employed nearly 2 million people in the United States.
On the negative side, the banking sector also has the capability of doing enormous
harm to the economy. In the subprime mortgage meltdown that began in 2007, for
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example, reckless lending on the part of some banks sent the economy into a tailspin
and triggered the Great Recession of 2007–2009. Regulatory reforms enacted since that
time may help avert a similar crisis in the future.
How Banks Are Regulated
Because of the vital role that banks play in the economy, governments around the
world have laws in place to try to prevent them from engaging in excessively risky
behavior. In the United States, for example, banks are regulated by an assortment of
federal and state agencies, depending on the type of bank.
The federal regulators include the Federal Reserve System, the Office of the
Comptroller of the Currency, and the FDIC. Credit unions, which also may be
considered part of the banking sector, are regulated by the National Credit Union
Administration.
State-chartered banks fall under the jurisdiction of state banking regulators and
supervisors.
Major Companies in the Banking Sector
Banks range dramatically in size, from the small-town corner bank to international
behemoths, sometimes referred to “global systemically important banks” or banks
considered “too big to fail” because of the havoc that their failure could supposedly
cause to the world economy.
In the United States today, the five largest banks are JPMorgan Chase, Bank of
America, Wells Fargo, Citibank, and US Bank. All but the last hold assets in excess of
$1 trillion.6
Why are banks called banks?
Some believe the word “bank” comes from banca, the Italian word for bench.
Merriam-Webster says banca also referred to “the benchlike counter at which an early
money changer transacted business.”
What are the different types of banks?
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 The common types of banks include central banks, commercial banks, and
investment banks. Central banks are government institutions, like the U.S. Federal
Reserve, whose role is to regulate their nation’s money supply. Commercial banks are
what most of us think of as banks, taking in deposits and issuing loans. Investment
banks generally work with companies to help them issue stock or find financing. Large
banks often have divisions for both commercial and investment banking.
How many banks are there in the United States?
There were 4,301 Federal Deposit Insurance Corp. (FDIC)-insured commercial
banks in the United States as of September 2021.
That number is dramatically down from previous decades, due to mergers,
consolidations, and bank failures. In 1984, the U.S. had more than 14,000 commercial
banks.
The Bottom Line
The banking sector has been important to nations’ economies since ancient times,
particularly in safeguarding wealth and providing credit to individuals and businesses.
Countries, including the United States, have regulations aimed at keeping banks from
getting into financial trouble and dragging down the entire economy. Those regulations
have met with mixed success over the years but continue to be refined.
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A well-functioning financial system is fundamental to a modern economy,
and banks perform important functions for society. They must therefore be secure.
Banks should be able to lend money to consumers and businesses in both
upturns and downturns. In addition, payments for goods and services should be
processed swiftly, safely and at low cost.
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 If banks fail to perform these tasks, the consequences for the entire economy
could quickly become so wide-reaching that even the banking system would be
exposed to large shocks. It is therefore important that banks are able to absorb
losses and meet their current payment obligations.
To ensure this, banks must comply with strict regulatory requirements.
Among these are the capital and liquidity (money that can be paid on short notice)
requirements applying to banks in order to ensure that they can meet their current
payment obligations.
The banks’ own payment systems are also required to be secure and efficient.
Responsibilities of the authorities
In Norway, the work on regulating and supervising the financial sector is
divided between the Ministry of Finance, Finanstilsynet (Financial Supervisory
Authority of Norway) and Norges Bank.
The Ministry of Finance has overriding responsibility and administers laws
and regulations that regulate the financial sector. The Ministry also plays an
important role in coordinating between the different authoritative bodies.
Finanstilsynet supervises each individual institution in the entire financial
sector and checks whether they all meet the applicable requirements.
Norges Bank oversees the financial system to gather information on
developments that threaten the system as a whole. As bankers’ bank, the central
bank also plays an important role in managing banking sector liquidity and can
provide or withdraw liquidity when necessary.
As the ultimate settlement bank in the Norwegian payment system, Norges
Bank also has a particular responsibility for supervising the interbank settlement
system.

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 REFERENCE

1. Akhundov B.Yu. Monopoly capital in the pre-revolutionary Baku oil

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