Banks and Banking Defined

AuthorM.H. Ogilvie
ProfessionChancellor's Professor and Professor of Law, Carleton University
Banking is a method of f‌i nancial intermediation whereby surplus fund s
are transmitted from savers to borrowers, and banks are t he institu-
tions which effect that transmission.1 The funds that bank s lend are
funds deposited by customers whose reward, i f any, is the amount of
interest promised to them by the bank for their deposits. Historically,
the primar y economic function of banks in any economy is to hold
funds deposited with t hem, to manage those funds on behalf of the de-
positors, and to make the funds available at a cost to borrowers, that is,
to be the primar y source for money in an economy. Lending at a prof‌it
provides banks w ith the incentive to engage in deposit taking in t he
f‌irst place and compensates for the cost of safekeeping savers’ deposit s
and permitting acce ss to them through payment instructions such as
cheques or electronic funds tra nsfers.
Although banks are the oldest f‌in ancial intermediarie s in the West,2
in the past two centuries, other f‌inancial inst itutions, such as trust
1 This def‌init ion is adapted from Benjamin Gev a, Bank Collections and Payment
Transactions: Comparative Study of Legal A spects (Oxford: Oxford Universit y
Press, 2001) at 7.
2 See generally E . Victor Morgan, The Theory and Practice of Central Bank ing
1797–1913 (New York: A.M. Kelley, 1943); James Milnes Holden, Th e History of
Negotiable Instru ments in English Law (London: Athlone Pres s, 1995); George
Tuc ker, The Theory of Money and Banks Investigate d (New York: A.M. Kelley,
and loan companies, cooperatives, and cred it unions, have offered this
same f‌inancial service to savers, in addition to their re spective and
unique roles in the economy. Many consumers commonly refer to these
institutions as “banks” and, broadly speaking, when they are carrying
on deposit-taking activities, t hey are subject to a legal and regulatory
framework similar to that of banks, as well as to the laws and regula-
tions relating to their d istinctive activities. But as discussed later,3 they
are not, legally speaking, ba nks, and therefore they are largely exclud-
ed from the scope of this text, which is about banks and banking law.
Deposit taking and lendi ng, together with payment instruction fa-
cilities to effect fund transmission, are at the heart of banking, and
their interrelationship is the reason for the economic eff‌iciencies in
banking. Bank s retain only adequate reser ves to meet reasonable cus-
tomer cash withdrawal requirements and they lend the rest, thereby
reducing safekeeping costs for customers and increa sing prof‌its from
borrowers. By developing interbank tran sfer facilities w ith other banks,
it becomes possible to transfer fund s throughout the economy by trans-
ferring credit, thereby reducing the need for interbank cash deliveries.
Multilateral clearing and settlement among banks is made more eff‌i-
cient through f‌inal settlement among bank accounts kept by each bank
at a central bank, such as t he Bank of Canada, so th at the physical
transfer of money is unnecess ary; both bank notes and deposits held
at the central bank are of equal value and are obligations of the central
bank. These features are found in the early modern precursors of the
1964); Richard D. Richard s, The Early History of Banking in England (New York:
A.M. Kelley, 1965); Raymond Bogaert, Les or igines antiques de la banq ue de
dépôt (Leyde: A.W. Sijthoff, 1966); Edward Nevin and E.M. Davi s, The London
Clearing Banks (London: Elek Book s, 1970); J. Kirschner, ed., Business, Banking
and Economic Thought in Lat e Medieval and Early Modern Europe: Selected Stu dies
of Raymond de Ro over (Chicago: Universit y of Chicago Press, 1974); Frank T.
Melton, Sir Robert Cla yton on the Origins of English Deposit Banking 1658–1685
(Cambridge: Cambrid ge University Press, 1986); Benjamin G eva, “From
Commodity to Cur rency in Ancient History : On Commerce, Tyranny and the
Modern Law of Money” (1987) 25 Osgoode Ha ll L.J. 115; Edwin Green, Bank-
ing: An Illustrated History (New York: Rizzoli, 1989); Glyn Davie s, A History of
Money from Ancie nt Times to the Present Day (Cardiff: Univer sity of Wales Press,
1994); David Mitchell, ed., Golds miths, Silversmiths and Bankers: Innovat ion and
the Transfer of Skill, 1550 to 1750 (Stroud, Gloucestershire: Al lan Sutton, 1995);
Richard Rob erts & David Kynaston, eds ., The Bank of England: Mone y, Power
and Inf‌luence 1694–1944 (Oxford: Clarend on Press, 1995); Benjamin Geva, The
Payment Order of Antiq uity and the Middle Ages: A Legal History (Oxford: Har t
Publishing, 2 011).
3 See Section C, be low in this chapter, for more about trust comp anies, coopera-
tives, and cred it unions.

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