The history of banking
2000BC
Merchants in the Ancient East started offering loans to farmers. Early debt system was prevalent.
1600AD
Modern merchant banking begins from rich trading cities such as Venice.
1900s – 1960s
Developments in telecommunication & computing brought major changes to banking operation and allowed them to increase in size and geographic spread. IMF & World Bank came into existence
1970s – 2000s
A series of small stock market crashes and bank failures led to new regulations being put in force and a significant globalization of banking and financial markets
Late 2000s
Subprime mortgage lending to borrowers with poor credit led to The Global Financial Crisis in 2007 which caused significant stress on banks around the world
2010s
Data analytics capabilities, security, privacy & fraud prevention became the prime focus. Financial inclusion of unbanked & the poor has picked up pace
Banking history dates back to about 2000 BC, when merchants gave grain loans to farmers and traders carried goods between cities in the areas of Babylonia and Assyria. The Code of Hammurabi, which dates back to around 1772 BC, is regarded as one of the oldest deciphered writings on the planet that deals with issues of contracts and sets the terms of business transactions. This code also mentions standardised procedures for handling loan amounts, interests, and guarantees. Moving onwards in human history, in ancient Greece and under the Roman Empire, lenders based in temples gave loans and started accepting deposits. Greek banking activities were more varied and sophisticated in nature, than in any of the previous societies. They engaged in various types of banking activities: they took deposits, made loans, they exchanged one currency for another and also tested coins for weight and purity. They also engaged in book transactions. In Greece, moneylenders could be found who accepted payments in one city and arranged credits in another city for their customers, which practically avoided the need for a customer to transport or transfer large quantities of coinage.
Some of the earliest systems which facilitated trading and exchange of goods were the barter system and gift economies, although barter systems were used mostly for exchanges of low-value items between strangers.
Earlier people used to exchange goods or services for the goods or services they sought in return, the advantage being that bartering does not require money. One can buy an item in exchange for some other thing one currently has but does not require. However, recent research by banking historians has upended the accepted idea that trade began with barter, as debt and credit have existed since the dawn of time, long before barter systems.
The gift culture (or gift economy) was a society where valuable commodities and services were regularly provided without an explicit agreement of instant or future rewards. These gifts were exchanged as per the informal customs prevailing in the society, rather than a categorical exchange of goods or services for currency or any other commodity. The gift economies had been prevalent before the dawn of market economies. However these cultures gradually disappeared as societies evolved into more complex systems. Divergent from the popular conception, there is no evidence that societies primarily relied on the barter system before using the currency for trade. Rather, non-monetary societies functioned largely upon the principles of gift culture and debt, unless the transaction was amongst complete strangers.
The modern banking era
In the modern sense of the word, banking can be traced back to medieval and the early Renaissance Italy, in the rich cities of Florence, Venice and Genoa. The rapid development of banking spread through Europe and a number of innovations took place in Amsterdam under the Dutch Republic during the 16th century and in London in the 17th century. The 20th century marked developments in telecommunications and computing which resulted in major changes to the ways in which banks operated and allowed them to expand both in size and geographic spread.
A key defining moment in banking history was the US stock market crash of 1929, followed by the Great Depression for the next 10 years. Brokerage & banking organizations were operating at a negligible margin requirement of just 10% during the Crash of 1929. This meant that brokerage firms would have to lend $9 for each $1 deposited by investors. When the markets fell, brokers called in their loans, which were not paid back. Banking systems failed as the debtors defaulted on debts and depositors attempted to withdraw deposits in multitudes, leading to a mass run on banks. Government guarantees & Federal Reserve banking regulations, which were put in place to prevent such panics, became ineffective or unused. Bank failures resulted in the loss of assets running into billions of dollars.
After the 1929 panic, and during the initial ten months of 1930, 744 banks in the US failed and in total, over 9,000 banks crashed during the 1930s. The US legislature passed the Glass-Steagall Act in 1933 to separate investment and retail banking, and the law remained in place until repealed by the Clinton administration during the 1990s. It is said that the depression of the 1930s was one of the prime factors which led to the Second World War. The post-war recovery period saw Western governments playing a more dynamic and bigger role in banking, resulting in increased regulations. In response to this, many countries increased their financial regulation considerably and established regulatory agencies to administer banking operations. During the post-Second World War period, two organizations came into existence, dominated by the US: the International Monetary Fund (IMF), and the World Bank.
During the 1970s, there were a number of small stock market crashes linked with the new regulations put in place, after the Great Depression. These crashes resulted in the deregulation of banking restrictions and privatization of financial institutions owned by governments. International banking and capital market services flourished during the 80s, after a number of countries deregulated financial markets. The 1986 ‘’Big Bang’’ in London allowed banks to step into the capital markets in fresh ways, which resulted in a significant change to banking operations and access to capital.
This era saw a substantial internationalization of financial markets. American corporations and banks alike started seeking investment opportunities overseas. This prompted development of mutual funds in the U.S., specializing in trading of stock markets abroad. The increasing internationalization transformed the competitive landscape, as now banks would strive to function as a “one-stop” supplier of both retail and wholesale financial services. Financial services continued this growth trend throughout the 80s & 90s due to increased demand from organizations, governments, and financial institutions. This was also the golden period of retail banking where products like credit cards, automobile loans, mortgages and several others were launched across the world. Retail banking boomed in the West and the era of global banking giants arrived.
In the early 2000s, banks began to consolidate on a vast scale, and major players started gaining entry into the market of other financial mediators – the Non-bank Financial Institutions (NBFIs). Big corporate players started getting into financial services, posing competition to established bank setups. Primary services offered during this period included insurance, pensions, money markets, mutual and hedge funds, loans, and credits and securities.
The financial innovation started advancing enormously in the first decade of this century, and banking firms started exploring newer areas of financial services. This led to diversification of banks and in turn had a positive impact on the wellness of the global economies. This decade marked the beginning of an era in which any distinction between various financial institutions, the banking and the non-banking withered away. Technological advances during this decade caused banks to shift from traditional branch banking to internet and electronic-banking.
In 2008, subprime mortgage lending to borrowers with poor credit ratings led to yet another financial crisis in the US. In September 2008, with the collapse of Lehman Brother in the United States, a major credit crisis broke out. Financial institutions across the globe were affected as the banking industry was truly globalised by that time. A number of institutions collapsed around the world, which forced central banks to take a considerable number of recovery measures to stabilise banking systems. The late-2000s financial crisis caused significant stress to banks worldwide and the failure of a large number of major banks resulted in government bailing out banks by recapitalising them. The global financial crisis forced governments around the world to take a hard look at their financial regulations.
There have been significant changes in the banking industry in the last ten years. Banks have been collecting vast amounts of data with regards to their customers, channels, financials & risk, and the accessibility of analytical technology has opened means to effectively manage and process vast amounts of data. Security, privacy and fraud prevention have become areas of prime focus and a number of measures have been taken in this regard. Globalisation of financial products and services thrived at an unprecedented pace. A vast number of initiatives were also launched for financial inclusion of the unbanked, poor and marginalised people. The industry witnessed the emergence of microfinance, microloans, mobile money, and other ancillary services geared to provide people in emerging or impoverished economies with reliable and secure financial services. More transparency and accountability have been enshrined in banking regulations across the world.
The Return to Retail banking:
With the meltdown of investment banking and shrinking margins in Corporate and Institutional banking, the global banking sector saw a renewed interest in retail banking. These activities — broadly defined as the range of products and services provided to consumers and small businesses — have grown in importance over the last few years. Retail-related positions now account for greater shares of commercial bank balance sheets, and the number of banking channels continues to expand with the digital economy. The recent emphasis on retail contrasts sharply with the views of the industry in the 1990s, when banks turned their attention to growing products, diversifying revenues, substituting alternative distribution platforms for branches, and providing a multitude of financial services to all forms of retail, corporate, and wholesale customers. This “return to retail” is reflected in a growing number of fintech and technology firms providing products and services aimed at consumers and small and medium-sized enterprises. Therefore, there is now a higher visibility of retail banking in balance sheets and financial statements of banks. There is a heightened level of attention given by the industry to retail banking activities now than ever before.