Is it still necessary to know what constitutes a bank - Essay Example

"Seeking to define a bank now is like trying to define an elephant, intuitively you know one when you see one although you cannot define it." - Sabalot Discuss. Is it still necessary to know what constitutes a bank Introduction To eliminate vagueness or ambiguity of a concept entails the formulation of a definition. However, one's definition extends to the breadth of his/her exposure to the subject matter. At times, though, development becomes rapid that one's knowledge or awareness regarding the subject lags behind. This could be said when seeking an exact definition of what a bank is. Advancements in technology and business have resulted in more efficient banking operations. The same have also resulted in increasingly complex banking systems and the laws governing banking operations, thus, making it relatively more difficult to come up with an encompassing definition across ages and disciplines. In the ancient times, it would be relatively easier to find a definition for banks due to the simplicity of the system and that people used common services. Over the years, some additional functions including the acceptance of deposits, transferring of money from one account to the other, extending of loans and investing of funds have become notable (Heaton). With the worldwide improvements in transportation and infrastructure, people have become increasingly mobile, trade on the international level occurred. At the rate trade both on the national and international levels has developed, banks have exponentially increased their functions and the services they provide. In this regard, aside from being economic agents, banks have evolved into becoming legal entities as well. This paper provides an overview of how banks are defined as economic agents and as legal entities. Economic Aspect Banks can be defined by economic agents based on their functions and classification, which are as follows: Banks (commercial banks) are privately or state- owned, offering a broad range of financial services to myriad economic agents subject to control and regulation of government agency concerned. They finance credit needs of individuals, firms and governments. Moreover, they receive deposits, transfer funds, issue traveler's checks and letters of credit, and safe keep valuables. Aside from these, they also serve as trustees for economic agents, act as agents for purchase and sale of assets and disseminate relevant information pertaining to the economy. (Menzies) Banks (savings banks) that promote savings especially for moderate-income earners where deposits of clients are invested in government obligation or treasury bills and other medium- to long-term industrial obligations (Menzies). They extend loans for single-family homes and other residential properties as well as business consumer loans and mortgages ("What's the Difference"). Banks (investment banks) primarily function to finance investments of both private enterprises and government across various levels. They market a variety of stocks and bond issues as well as arrange mergers and assist in a number of specialized lending fields. (Menzies) Although the functions of these banks have become less distinct over the years, differences lie in the regulatory and supervisory structures ("What's the Difference"). Depending on their legal classification, these banks are regulated by different government agencies and regulatory bodies. Their operations are governed by laws stipulated in the UK Banking Act 1987. There are also some financial intermediaries with functions similar to a bank, but not classified as banks. The definitions given above do not seem to differentiate these non-bank institutions from banks in terms of function. Non-bank financial institutions may include the following: Credit Unions. These are cooperative financial institutions formed by groups of people who pool their funds which serve as based deposits. Similarly, they accept deposits in a variety of accounts just like banks. ("What's the Difference") Savings and Loan Associations. These financial institutions are allowed to perform banking services, as the name suggests. This is brought about by the deregulation in banking industry in many countries. However, they do not offer full financial services and are subject to less strict laws ("Legal-Dictionary"). Building Societies. They are also cooperative financial institutions which provide funding for people primarily for building or acquiring homes. They can also provide personal loans and other financial services offered by banks. (Davidmann) The undertakings of non-bank financial institutions, although not considered as banks, are still subject to the laws set and implemented by particular regulatory bodies. These laws, however, are differentiated from financial laws generally governing banks. Often times, regulations for non-bank financial institutions are less stringent, which may potentially diminish the protection of clients' interests. Legal Aspect Given the wide-array of meanings and the different classification of financial institutions, even the common law does not provide an exhaustive definition of what a bank is ("What is a Bank). Although limited in scope, there are some cases which provide definition of a bank. These selected cases are as follows: United Dominions Trust Limited -v- Kirkwood (1966) 2 QB 431. In this case, it is contended whether United Dominions Trust Limited was an unlicensed creditor or not (Cranston). As per Lord Denning MR, it is deemed vital for the business of banking that a banker should accept money from his customers upon a running account into which sums of money are from time to time paid by the customer and from time to time withdrawn by him. Moreover, for one to be considered to be in the business of banking, "the banker must also undertake to pay cheques drawn upon himself (the banker) by his customers in favor of third parties up to the amount standing to their credit in their current accounts and to collect cheques for his customers and credit the proceeds to their current accounts," ("What is a Bank"). Commissioners of the State Savings Bank of Victoria -v- Permewan, Wright and Co (1914) 19 CLR 457. According to Isaacs J., "The essential characteristics ofbanking arethe collection of money by receiving deposits upon loan, repayable when and as expressly or impliedly agreed upon, and the utilization of the money so collected by lending it again in such sums as are required. These are the essential functions of a bank as an instrument of society. It is, in effect, a financial reservoir receiving streams of currency in every direction, and from which there issue overflowing streams where and as required to sustain and fructify or assist commercial, industrial or other enterprises or adventures," (Kutyn 19) The above definitions pertain to the usual characteristics of banking business which most people are accustomed to. However, Cranston believes that these definitions are too limiting. For instance, in the first case cited above, definition is limited to the payment through cheque system. In this regard, traditional savings banks and merchant banking are set apart. These specified definitions, then, do not completely stipulate all the characteristics of banking business. There may be other valid legal definition of what a bank is depending on particular context. Aside from this, a statutory definition may also be derived using different approaches. In one approach, a bank may be defined as any body accredited by government authority. This definition though credits the state with too great discretionary powers if the criteria for being classified as a bank is not indicated (Cranston). Other methods by which banks are defined are the listing and formulary approaches. In the listing method, the activities undertaken in banking are listed. This approach is adopted in the National Bank Act of the United States and German Banking Act. With this approach, constant updating is required as banking activities continually expand. Furthermore, it should clearly be stated as to what activities are incidental and those under which banks are confined. (Cranston) On the other hand, the formulary approach entails a general definition of banks. The UK definition provides the critical features of deposit taking. In the UK definition, an legal entity is considered to be in the deposit taking business "if in the course of the business money received by way of deposit is lent to others, or any other of its activities are financed out of money so received," (Cranston 8). In the UK Banking Act 1987, it is clarified that bodies may act like banks are not classified by law as banks as in the case of credit unions and building societies. The UK definition has been criticized to be very extensive and needs further limiting (Cranston). Similarly, the European Community (EC) definition utilizes this method. As per Article 1 of both the First and Second Bartking Directives of the European Community, bank, as a credit institution, is defined as deposit taking from public together with granting credits from its own account. This definition is deemed to be in accordance with the traditional services provided by banks and covers the activities of savings and central banks, although their exclusion is stipulated in the said Directive. (Cranston) Conclusion It is apparently difficult to formulate a general definition of a bank that could be clearly understood by all due to varying degrees of exposure to these financial intermediaries. In the same way, it is problematical to define an elephant in terms of description, function or type to someone who has not seen this majestic, gargantuan creature without causing confusing or erroneous visual imagery. With the rapid developments in the banking system, banks can only be defined ostensively. Although words are not used and consensus as to the general meaning is not reached, people have a common understanding of what banks are and how indispensable they have become. Given the fast evolution of banking and how complex the systems have become, people may have various denotations for banks as words acquire meanings only through being used or understood in particular circumstances (Guralink). It is deemed that the contract between the banks and their customers are not set out in black-and-white but are founded on customs and usages. These are the implied terms of the contract legally recognized (Kutyn). References Cranston, Ross. Principles of Banking Law. Clarendon Press, 1997 Davidnamm, Manfred. Building Societies 02 August 2005 Guralink, David B. "Lexicography." Collier's Encyclopedia. MacMillan Educational Company, 1988. Kutyn, John. Nature of Money. 02 August 2005 Legal-Dictionary. 02 August 2005 Menzies, Robert. "Banking Systems." Collier's Encyclopedia. MacMillan Educational Company, 1988. What is a Bank 02 August 2005 What is the Difference Pennsylvania Association of Community Bankers. 02 August 2005 Read More