Banks and Banking Defined

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

1

CHAPTER 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 institu-

tions which effect that transmission.1 The funds that banks lend are

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

interest promised to them by the bank for their deposits. Historically,

the primary 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 banks with the incentive to engage in deposit taking in the

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

and permitting access to them through payment instructions such as

cheques or electronic funds transfers.

Although banks are the oldest f‌inancial intermediaries in the

West,2 in the past two centuries, other f‌inancial institutions, such as

1This 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.

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

1797–1913 (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 CANADA2

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 activities, they 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 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 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. Banks retain only adequate reserves to meet reasonable cus-

tomer cash withdrawal requirements and they lend the rest, thereby

reducing safekeeping costs for customers and increasing prof‌its 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, thereby reducing the need for interbank cash deliveries.

Multilateral clearing and settlement among banks is made more eff‌i-

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

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

transfer of money is unnecessary; 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

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).

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

tives, and cre dit unions.