Banks and Banking Defined

• Author: M.H. Ogilvie
• Profession: Professor of Law, Carleton University
• Pages: 1-23

1

CHAP TER 1

BANKS AND BANKING

DEFINED

A. INTRODUCTION

Banking is a method of f‌i nancial intermediation whereby surplus fu nds

are transmitted from savers to borrowers, and banks are the inst itu-

tions which effect that transmission.1 The funds that bank s lend are

funds deposited by customers whose reward, if any, is the amount of

interest promised to them by t he 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 fund s available at a cost to borrowers, that is,

to be the primary source for money in an economy. Lending at a prof‌it

provides bank s with the incentive to engage in deposit taking in t he

f‌irst place and compensates for the cost of safekeeping savers’ deposits

and permitting acce ss to them through pay ment instructions such a s

cheques or electronic funds tran sfers.

Although banks are the oldest f‌in ancial intermediaries in the

Wes t, 2 in the past two centuries, other f‌ina ncial institutions, such as

1 This def‌init ion is adapted from Benjamin Ge va, Bank Collections and Payment

Transactions: Comparative Study o f Legal Aspects (Oxford: Oxford Univer sity

Press, 2001) at 7.

2 See generall y E. Victor Morgan, The Theory and Pract ice of Central Banking

1797– 191 3 (New York: A.M. Kelley, 1943); James Milnes Holden, The Hi story of

Negotiable Instru ments in English Law (London: Athlone Pre ss, 1995); George

BANK AND C USTOMER LAW IN C ANADA2

trust and loan companie s, cooperatives, and credit unions, have offered

this same f‌in ancial 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 activitie s, they are subject to a legal and regulatory

framework similar to t hat of banks, as well a s to the laws and regul a-

tions relating to their d istinctive activities. But as discussed later,3 they

are not, legally speaki ng, banks, and therefore they are largely excluded

from the scope of this text, which is about banks and banking law.

Deposit taking and lending, together with payment inst ruction fa-

cilities to effect fund transmi ssion, are at the heart of bank ing, and

their interrelationship is the reason for the economic eff‌iciencies in

banking. Ban ks retain only adequate reserves to meet rea sonable cus-

tomer cash withdrawal requirements and they lend the rest, thereby

reducing safekeeping costs for customers and increasing prof‌it s from

borrowers. By developing interbank tr ansfer facilities with other ban ks,

it becomes possible to tran sfer funds throughout the economy by trans-

ferring credit, t hereby reducing the need for interbank cash deliveries.

Multilateral clearing and settlement among banks i s made more eff‌i-

cient through f‌inal settlement among ban k accounts kept by each bank

at a central bank, such as t he Bank of Canada, so that the physical

transfer of money is unneces sary; both bank notes and deposits held

at the central bank are of equ al value and are obligations of the central

bank. These features a re found in the early modern precursors of the

Tuc ke r, The Theory of Mone y and Banks Investigated (New York: A.M. Kelley,

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 banqu e de

dépôt (Leyde: A.W. Sijthoff, 1966); Edward Nev in and E.M. Davis, The Lo ndon

Clearing Banks (London: Elek Book s, 1970); J. Kirschner, ed., Business, Banking

and Economic Thought in Late Medieval and Early Modern Europe: Selected Studies

of Raymond de R oover (Chicago: University of Chicago Pre ss, 1974); Frank T.

Melton, Sir Robert Clayt on on the Origins of English Deposit Banking 1658–1685

(Cambridge: Cambri dge University Press, 1986); Benjami n Geva, “From

Commodity to Cur rency in Ancient Histor y: On Commerce, Tyranny and the

Modern Law of Money ” (1987) 25 Osgoode Hall L .J. 115; Edwin Green, Bank-

ing: An Illustrated History (New York: Ri zzoli, 1989); Glyn Davies, A History of

Money from Anci ent Times to the Present Day (Cardiff: Un iversity of Wales Press,

1994); David Mitchell, ed., Goldsmit hs, Silversmiths and Bankers: Innovat ion and

the Transfer of Skill, 1550 to 1750 (Stroud, Gloucestershi re: Allan Sutton, 1995);

Richard Robe rts & David Kynaston, eds., Th e Bank of England: Money, Power

and Inf‌luence 1694–1944 (Oxford: Clare ndon Press, 1995).

3 See Section C, b elow in this chapter, for more about trust compa nies, coopera-

tives, and cre dit unions.