DEFINITION: A bank is an institution which holds money received from depositors in custody and lends money to borrowers.
ETYMOLOGY: The word “bank” in its modern meaning derives from either Middle French banque or Old Italian banca, both of which originally meant “bench.” The word is also connected to the Middle English benc and the Old High German bank, both also meaning “bench.”
USAGE: Banking has roots in Antiquity, specifically in the growth of long-distance trade subsequent to the transition to agriculture. This occurred especially in Mesopotamia and the Indus River Valley civilization around 2000 BC, where local grain merchants began making loans to farmers and long-distance traders.
Some centuries later, in many civilizations from Greece and Rome to India and China, religious temples began to be associated with moneylending. This practice waxes and waned for many centuries.
Banking in a recognizably modern form may be traced to the wealthy Italian city states of the late Middle Ages and Renaissance, notably Venice, Florence, and Genoa, which saw the emergence of merchant banks involved in increasingly wide trading networks with the rest of the world, from the Islamicate (North Africa and the Middle East) to India and China.
One of the best-known of these banks was established by the Medici family in Florence in 1397.
Because Christianity looked askance at lending money at interest and because Jews were not allowed to own real estate in Italy during the Middle Ages, many Jews living in Italy at that time gravitated to banking.
Following the European discovery of the New World by Christopher Columbus in 1492 and the first circumnavigation of the globe led by Ferdinand Magellan, completed in 1522, the need for banks to finance the emerging worldwide trading networks increased exponentially.
At this time, bankers began to raise money by means of debt issues in the form of the sale of stocks.
As the phenomenon of merchant banks spread north of the Alps and throughout the Holy Roman Empire, many new families came to European prominence, notably, the Fugger family, based in Augsburg in Bavaria.
After the formation of the modern nation state, national banks came into being which had a much wider remit than the traditional merchant banks had had. Namely, they were used as a means of helping to control national economies and thus as a tool of governance.
One of the earliest national banks was Sveriges Riksbank, founded in Stockholm in 1668.
International banking—which may be defined as multinational banking entities, especially when they lend to sovereign states—came into being during the nineteenth century. The Rothschild family, with roots in Germany, pioneered this new development with its loans to the Bank of England.
As banks have increased in economic and political importance, they have also come under increasingly strict legal control.
At the same time, over the course of the twentieth century, “banking” in a wide sense has greatly expanded the scope of its activities. Today, the financial sector contributes something approaching a quarter of GDP worldwide.