History of banking

The first banks were probably the religious temples of the ancient world, and were probably
established in the third millennium BC. Banks probably predated the invention of money.
Deposits initially consisted of grain and later other goods including cattle, agricultural
implements, and eventually precious metals such as gold, in the form of easy-to-carry
compressed plates. Temples and palaces were the safest places to store gold as they were
constantly attended and well built. As sacred places, temples presented an extra deterrent to
would-be thieves. There are extant records of loans from the 2nd century BC in Babylon that
were made by temple priests/monks to merchants.

1. Earliest banks
By the time of Hammurabi's Code, dating to ca. 1760 BCE, banking was well enough
developed to justify laws governing banking operations.[1] Ancient Greece holds further
evidence of banking. Greek temples, as well as private and civic entities, conducted financial
transactions such as loans, deposits, currency exchange, and validation of coinage.[2] There
is evidence too of credit, whereby in return for a payment from a client, a moneylender in one
Greek port would write a credit note for the client who could "cash" the note in another city,
saving the client the danger of carting coinage with him on his journey. Pythius, who operated
as a merchant banker throughout Asia Minor at the beginning of the 5th century BC, is the
first individual banker of whom we have records. Many of the early bankers in Greek city-
states were metics or foreign residents. Around 371 BC, Pasion, a slave, became the
wealthiest and most famous Greek banker, gaining his freedom and Athenian citizenship in
the process. The 4th century BC saw increased use of credit-based banking in the
Mediterranean world. In Egypt, from early times, grain had been used as a form of money in
addition to precious metals, and state granaries functioned as banks. When Egypt fell under
the rule of a Greek dynasty, the Ptolemies (332-30 BC), the numerous scattered government
granaries were transformed into a network of grain banks, centralized in Alexandria where the
main accounts from all the state granary banks were recorded. This banking network
functioned as a trade credit system in which payments were effected by transfer from one
account to another without money passing.In the late 3rd century BC, the barren Aegean
island of Delos, known for its magnificent harbor and famous temple of Apollo, became a
prominent banking center. As in Egypt, cash transactions were replaced by real credit receipts
and payments were made based on simple instructions with accounts kept for each client.
With the defeat of its main rivals, Carthage and Corinth, by the Romans, the importance of
Delos increased. Consequently it was natural that the bank of Delos should become the model
most closely imitated by the banks of Rome.

Ancient Rome perfected the administrative aspect of banking and saw greater regulation of
financial institutions and financial practices. Charging interest on loans and paying interest on
deposits became more highly developed and competitive. The development of Roman banks
was limited, however, by the Roman preference for cash transactions. During the reign of the
Roman emperor Gallienus (260-268 AD), there was a temporary breakdown of the Roman
banking system after the banks rejected the flakes of copper produced by his mints. With the
ascent of Christianity, banking became subject to additional restrictions, as the charging of
interest was seen as immoral. After the fall of Rome, banking was abandoned in western
Europe and did not revive until the time of the crusades.

Religious restrictions on interest

Most early religious systems in the ancient Near East, and the secular codes arising from
them, did not forbid usury. These societies regarded inanimate matter as alive, like plants,
animals and people, and capable of reproducing itself. Hence if you lent 'food money', or
monetary tokens of any kind, it was legitimate to charge interest.[4] Food money in the shape
of olives, dates, seeds or animals was lent out as early as c. 5000 BC, if not earlier. Among the
Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the
state.[5]

The Torah and later sections of the Hebrew Bible criticize interest-taking, but interpretations of
the Biblical prohibition vary. One common understanding is that Jews are forbidden to charge
interest upon loans made to other Jews, but obliged to charge interest on transactions with
non-Jews, or Gentiles. However, the Hebrew Bible itself gives numerous examples where this
provision was evaded.

In Islam it is strictly prohibited to take interest; the [Quran] which is the Islamic holy book
strictly prohibited lending money on Interest. O you who have believed, do not consume
usury, doubled and multiplied, but fear Allah that you may be successful (3:130) and Allah has
permitted trade and has forbidden interest (2:275).

2. During Late Antiquity and Middle Ages

During the 3rd century AD, banks in Persia and other territories in the Persian Sassanid
Empire issued letters of credit known as akks.

Muslim traders are known to have used the cheque or akk system since the time of Harun al-
Rashid (9th century) of the Abbasid Caliphate. In the 9th century, a Muslim businessman
could cash an early form of the cheque in China drawn on sources in Baghdad,[6] a tradition
that was significantly strengthened in the 13th and 14th centuries, during the Mongol Empire.
Indeed, fragments found in the Cairo Geniza indicate that in the 12th century cheques
remarkably similar to our own were in use, only smaller to save costs on the paper. They
contain a sum to be paid and then the order "May so and so pay the bearer such and such an
amount". The date and name of the issuer are also apparent.

Jews were ostracized from most professions by local rulers, the Church and the guilds and so
were pushed into marginal occupations considered socially inferior, such as tax and rent
collecting and money lending, while the provision of financial services was increasingly
demanded by the expansion of European trade and commerce.

Medieval trade fairs, such as the one in Hamburg, contributed to the growth of banking in a
curious way: moneychangers issued documents redeemable at other fairs, in exchange for
hard currency. These documents could be cashed at another fair in a different country or at a
future fair in the same location. If redeemable at a future date, they would often be
discounted by an amount comparable to a rate of interest. Eventually, these documents
evolved into bills of exchange, which could be redeemed at any office of the issuing banker.
These bills made it possible to transfer large sums of money without the complications of
hauling large chests of gold and hiring armed guards to protect the gold from thieves.

Beginning around 12th century, the need to transfer large sums of money to finance the
Crusades stimulated the re-emergence of banking in western Europe. In 1156, in Genoa,
occurred the earliest known foreign exchange contract. Two brothers borrowed 115 Genoese
pounds and agreed to reimburse the bank's agents in Constantinople the sum of 460 bezants
one month after their arrival in that city. In the following century the use of such contracts
grew rapidly, particularly since profits from time differences were seen as not infringing canon
laws against usury. In 1162, King Henry the II levied a tax to support the crusadesthe first of
a series of taxes levied by Henry over the years with the same objective. The Templars and
Hospitallers acted as Henry's bankers in the Holy Land. The Templars' wide flung, large land
holdings across Europe also emerged in the 11001300 time frame as the beginning of
Europe-wide banking, as their practice was to take in local currency, for which a demand note
would be given that would be good at any of their castles across Europe, allowing movement
of money without the usual risk of robbery while traveling.

By 1200 there was a large and growing volume of long-distance and international trade in a
number of agricultural commodities and manufactured goods in western Europe; some of the
goods traded during that period included wool, finished cloth, wine, salt, wax and tallow,
leather and leather goods, and weapons and armour. Individual trading concerns and
combines often specialized in one or more of these, as did individual producers; because a
large amount of capital was required to establish, e.g., a cloth manufacturing business, only
the largest firms could diversify. As a result, businesses and clusters of businesses tended to
market fairly narrow product lines. Big firms like the Medici bank could and did specialize; the
Medicis manufacturing division had a number of manufacturing facilities producing many
different types of cloth. Perhaps the best example of product policy comes from the Cistercian
monastic order, where individual monasteries and granges tended to specialize in particular
agricultural products or types of industrial production, usually with an eye to meeting
particular local or regional market needs.

Ironically, the Papal bankers were the most successful of the Western world, though often
goods taken in pawn were substituted for interest in the institution termed the Monte di Piet.
When Pope John XXII (born Jacques d'Euse (12491334) was crowned in Lyon in 1316, he set
up residency in Avignon. Civil war in Florence between the rival Guelph and Ghibelline factions
resulted in victory for a group of Guelph merchant families in the city. They took over papal
banking monopolies from rivals in nearby Siena and became tax collectors for the Pope
throughout Europe. In 1306, Philip IV expelled Jews from France. In 1307 Philip had the
Knights Templar arrested and acquired their wealth, which had become to serve as the
unofficial treasury of France. In 1311 he expelled Italian bankers and collected their
outstanding credit. In 1327, Avignon had 43 branches of Italian banking houses. In 1347,
Edward III of England defaulted on loans. Later there was the bankruptcy of the Peruzzi (1374)
and Bardi (1353). The accompanying growth of Italian banking in France was the start of the
Lombard moneychangers in Europe, who moved from city to city along the busy pilgrim routes
important for trade. Key cities in this period were Cahors, the birthplace of Pope John XXII, and
Figeac. Perhaps it was because of these origins that the term Lombard is synonymous with
Cahorsin in medieval Europe, and means 'pawnbroker'. Banca Monte dei Paschi di Siena SPA
(MPS) Italy, is the oldest surviving bank in the world.

After 1400, political forces turned against the methods of the Italian free enterprise bankers.
In 1401, King Martin I of Aragon expelled them. In 1403, Henry IV of England prohibited them
from taking profits in any way in his kingdom. In 1409, Flanders imprisoned and then expelled
Genoese bankers. In 1410, all Italian merchants were expelled from Paris. In 1401, the Bank of
Barcelona was founded. In 1407, the Bank of Saint George was founded in Genoa. This bank
dominated business in the Mediterranean. In 1403 charging interest on loans was ruled legal
in Florence despite the traditional Christian prohibition of usury. Italian banks such as the
Lombards, who had agents in the main economic centers of Europe, had been making charges
for loans. The lawyer and theologian Lorenzo di Antonio Ridolfi won a case which legalized
interest payments by the Florentine government. In 1413, Giovanni di Bicci deMedici was
appointed banker to the pope. In 1440, Gutenberg invents the modern printing press although
Europe already knew of the use of paper money in China. The printing press design was
subsequently modified, by Leonardo da Vinci among others, for use in minting coins nearly
two centuries before printed banknotes were produced in the West.
By the 1390s silver was short all over Europe, except in Venice. The silver mines at Kutn
Hora had begun to decline in the 1370s, and finally closed down after being sacked by King
Sigismund in 1422. By 1450 almost all of the mints of northwest Europe had closed down for
lack of silver. The last money-changer in the major French port of Dieppe went out of business
in 1446. In 1455 the Turks overran the Serbian silver mines, and in 1460 captured the last
Bosnian mine. The last Venetian silver grosso was minted in 1462. Several Venetian banks
failed, and so did the Strozzi bank of Florence, the second largest in the city. Even the
smallest of small change became scarce.

3. Western banking history

The Church officially prohibited usury, which reafirmed the view that it was a sin to charge
interest on a money loan. The development of double entry bookkeeping would provide a
powerful argument in favor of the legitimacy and integrity of a firm and its profits.[7] There is
evidence of bookkeeping practices starting in the 13th century, while the Farolfi ledger of
12991300 is the earliest evidence of full double-entry bookkeeping.[8] Giovanno Farolfi &
Company were a firm of Florentine merchants whose head office was in Nmes whose ledger
shows that they also acted as moneylender to Archbishop of Arles, their most important
customer. His patronage must also have shielded the Florentines from any trouble over the
Church's official ban on usury, which in any case was not seriously enforced, provided the rate
of interest was not extortionate; the Archbishop himself borrowed from the Farolfi at 15 per
cent per annum.[9]

Banking in the modern sense of the word can be traced to medieval and early Renaissance
Italy, to the rich cities in the north like Florence, Venice and Genoa.The Bardi and Peruzzi
families dominated banking in 14th century Florence, establishing branches in many other
parts of Europe.[10] Perhaps the most famous Italian bank was the Medici bank, set up by
Giovanni Medici in 1397.[11] Modern Western economic and financial history is usually traced
back to the coffee houses of London.[citation needed] The London Royal Exchange was
established in 1565. At that time moneychangers were already called bankers, though the
term "bank" usually referred to their offices, and did not carry the meaning it does today.
There was also a hierarchical order among professionals; at the top were the bankers who did
business with heads of state, next were the city exchanges, and at the bottom were the pawn
shops or "Lombard"'s. Some European cities today have a Lombard street where the pawn
shop was located. [[Berenberg Bank is the oldest private bank in Germany, established in
1590 by Dutch brothers, Hans and Paul Berenberg in Hamburg (Price waterhousecooper
Financial Year Book FYB, 2009).]]

After the siege of Antwerp trade moved to Amsterdam. In 1609 the Amsterdamsche
Wisselbank (Amsterdam Exchange Bank) was founded which made Amsterdam the financial
center of the world until the Industrial Revolution.

Banking offices were usually located near centers of trade, and in the late 17th century, the
largest centers for commerce were the ports of Amsterdam, London, and Hamburg.
Individuals could participate in the lucrative East India trade by purchasing bills of credit from
these banks, but the price they received for commodities was dependent on the ships
returning (which often didn't happen on time) and on the cargo they carried (which often
wasn't according to plan). The commodities market was very volatile for this reason, and also
because of the many wars that led to cargo seizures and loss of ships.

Capitalism
Around the time of Adam Smith (1776) there was a massive growth in the banking industry.
Banks played a key role in moving from gold and silver based coinage to paper money,
redeemable against the bank's holdings.

Within the new system of ownership and investment, the state's role as an economic factor
changed substantially.

4. Global banking
In the 1970s, a number of smaller crashes tied to the policies put in place following the
depression, resulted in deregulation and privatization of government-owned enterprises in the
1980s, indicating that governments of industrial countries around the world found private-
sector solutions to problems of economic growth and development preferable to state-
operated, semi-socialist programs. This spurred a trend that was already prevalent in the
business sector, large companies becoming global and dealing with customers, suppliers,
manufacturing, and information centres all over the world.

Global banking and capital market services proliferated during the 1980s and 1990s as a
result of a great increase in demand from companies, governments, and financial institutions,
but also because financial market conditions were buoyant and, on the whole, bullish. Interest
rates in the United States declined from about 15% for two-year U.S. Treasury notes to about
5% during the 20-year period, and financial assets grew then at a rate approximately twice
the rate of the world economy. Such growth rate would have been lower, in the last twenty
years, were it not for the profound effects of the internationalization of financial markets
especially U.S. Foreign investments, particularly from Japan, who not only provided the funds
to corporations in the U.S., but also helped finance the federal government; thus,
transforming the U.S. stock market by far into the largest in the world.[citation needed]

Nevertheless, in recent years, the dominance of U.S. financial markets[citation needed] has
been disappearing and there has been an increasing interest in foreign stocks. The
extraordinary growth of foreign financial markets results from both large increases in the pool
of savings in foreign countries, such as Japan, and, especially, the deregulation of foreign
financial markets, which has enabled them to expand their activities. Thus, American
corporations and banks have started seeking investment opportunities abroad, prompting the
development in the U.S. of mutual funds specializing in trading in foreign stock markets.

Such growing internationalization and opportunity in financial services has entirely changed
the competitive landscape, as now many banks have demonstrated a preference for the
universal banking model prevalent in Europe. Universal banks are free to engage in all
forms of financial services, make investments in client companies, and function as much as
possible as a one-stop supplier of both retail and wholesale financial services.

Many such possible alignments could be accomplished only by large acquisitions, and there
were many of them. By the end of 2000, a year in which a record level of financial services
transactions with a market value of $10.5 trillion occurred, the top ten banks commanded a
market share of more than 80% and the top five, 55%. Of the top ten banks ranked by market
share, seven were large universal-type banks (three American and four European), and the
remaining three were large U.S. investment banks who between them accounted for a 33%
market share.[citation needed]

This growth and opportunity also led to an unexpected outcome: entrance into the market of
other financial intermediaries: nonbanks. Large corporate players were beginning to find their
way into the financial service community, offering competition to established banks. The main
services offered included insurances, pension, mutual, money market and hedge funds, loans
and credits and securities. Indeed, by the end of 2001 the market capitalisation of the worlds
15 largest financial services providers included four nonbanks.

In recent years, the process of financial innovation has advanced enormously increasing the
importance and profitability of nonbank finance. Such profitability priorly restricted to the
nonbanking industry, has prompted the Office of the Comptroller of the Currency (OCC) to
encourage banks to explore other financial instruments, diversifying banks' business as well
as improving banking economic health. Hence, as the distinct financial instruments are being
explored and adopted by both the banking and nonbanking industries, the distinction between
different financial institutions is gradually vanishing.