BANK. — By "bank" (banca) in general, we mean those institutions which, although they do not directly produce material goods or services to satisfy human needs (agriculture and industry in the broad sense), nor physically transfer goods over distance (transport), nor exchange and distribute them among consumers (commerce), nevertheless contribute to the entire economic activity of society by, on the one hand, providing the means of payment essential for transactions and, on the other, granting that unique immaterial good which is credit.
1) The two principal functions exercised by banks are the monetary function and the credit function. The monetary function consists in making available to the public payment instruments that are more convenient, more manageable, and less costly to transfer than metallic money; such instruments are represented by banknotes and checks. Historically, banks began by exercising this function: in exchange for deposits of metallic coins of various types and differing fineness, the first public banks adopted the practice of issuing certificates of corresponding value expressed in a standard unit of account. Subsequently, these certificates assumed the typical form of banknotes, whose issuance eventually became concentrated in one or a few banks (issuing banks). At present, the plurality of issuing banks exists only in the United States of America, where, however, a special body, the Federal Reserve Board, coordinates and controls the activity of all of them.
Deposits of banknotes, or even of metallic money, enable those who have made them to draw checks for the corresponding amount. The total volume of checks in circulation is commonly referred to as bank money.
Banknotes may be issued not only against deposits of metallic money but also as a result of other operations, so that part of the banknotes may no longer have metallic backing. Similarly, the right to draw checks may be granted to depositors for an amount exceeding their deposit, as well as to economic entities that have made no prior deposit. In all such cases, the bank fulfills the credit function, i.e., it supplies credit to entities wishing to use it for productive or consumptive purposes. Strictly speaking, the credit function can be exercised in two ways: on the one hand, by granting to those who request it the use of savings that have flowed into and been collected by banks through deposits; on the other, by creating new means of payment in the form of issuing banknotes and enabling the drawing of checks beyond what would be permitted by metallic backing and the volume of deposits. Earlier, credit was defined as a unique immaterial good, inasmuch as in the classic tripartite division of productive factors (natural factors, labor, capital), it is from credit that capital necessary for production is drawn, to supplement that obtained insufficiently through business self-financing.
A third function of banks, related to the credit function, is the function of capital investment, which consists in directing newly formed savings seeking employment toward the most advantageous uses.
2) Banking activity is carried out through active and passive operations. Through the latter, banks procure capital, which they then lend to those in need through active operations.
The principal active operations are discounting bills, usually represented by promissory notes, advances on the pledge of securities or goods, opening current accounts, etc. In the discounting operation, which represents the most widespread and important form of credit extension, the bank agrees to pay, upon delivery of a bill (the promissory note), a sum equivalent to the amount written on the bill, less a certain deduction. This deduction, which constitutes the interest accruing until the borrowed sum is repaid to the bank, is what is commonly called the discount in the strict sense; the increase or decrease of the discount rate, regulated by the central bank, makes credit more or less costly, thereby restricting or expanding its use. When owners of securities or goods are advanced the price they will later obtain from the securities or goods themselves, the loans made by the bank are called advances. Owners of real estate may be granted loans in the form of mortgage loans. When none of these operations is resorted to, credit may be granted simply by opening a current account, which entitles the beneficiary to draw checks on the bank for a specified amount; even for other operations, the technical form of utilizing credit occurs through current account openings.
The principal passive operations are the issuance of banknotes and the acceptance of deposits, as well as what is called rediscounting. Through the issuance of banknotes, the bank obtains capital in the form of metallic money or bullion and in exchange gives what is legally a true credit instrument, namely, a promissory note payable on demand and to the bearer for the amount indicated, representing the value previously received. However, not only is this operation now carried out exclusively by issuing banks, but with the establishment of forced circulation, which compels the public to accept banknotes without any right to convert them into metallic money or bullion, the entire operation assumes aspects and characteristics fundamentally different from the typical ones. Since at present no country in the world has convertible banknotes, nor is a return to such a system foreseeable in the future, and moreover, because the exclusive right of issuance is limited to one or, at most, a few banks, we may attach to the issuance of banknotes, as a passive operation, only a conceptual and historical significance.
A typical passive operation, however, remains that relating to deposits, through which the bank collects capital to be used for granting credit, making investments, or, more generally, carrying out active operations. The sums deposited by the public, although remaining at the bank's disposal, will be returned according to predetermined terms and maturity in their exact amount. Depositors, however, are paid a compensation (interest), which represents the price for the bank's use of the funds deposited; interest can be paid because the bank, by employing the deposited funds, achieves profits.
Another typical passive operation is what is commonly called rediscounting. The bank in question transfers bills it has already discounted to another bank, usually the issuing institution, in order to realize their value through a new discount. In this way, the issuing institution performs an active financing operation with respect to the bank that has presented the bills.
3) The term "bank" is extremely generic, being applied both to banks properly so called and to credit institutions. Strictly speaking, banks properly so called would be those organizations that perform only the monetary function, while credit institutions would be specialized in fulfilling the credit function. Based on this distinction, the former would include issuing banks and deposit and discount banks, while the latter would comprise securities credit institutions and the so-called mixed banks. This functional distinction is unclear in practice and, indeed, it is highly doubtful that it can be applied. In fact, while it is true that credit institutions perform exclusively the credit function, banks properly so called also end up exercising the same function, albeit in different forms and modalities. This occurs because the issuing bank issues notes in excess of its metallic reserves and in relation to the granting of checks for amounts exceeding the funds deposited by deposit and discount banks.
It follows that the classification of banks and credit institutions must be made on the basis of another criterion, and practically that of the actual activity carried out by each banking organization, with particular regard to the type of operations to which each is dedicated. As for issuing banks, about which we have already spoken, it remains to say that in modern economies the task entrusted to them is to regulate the entire monetary and credit mechanism of a country, and for this reason they are also called central banks. Deposit and discount banks, after having collected capital through the typical deposit operations,
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proceed to distribute it, especially by discounting bills of exchange presented by borrowers. Given the succession of deposits and withdrawals, only a certain percentage of deposits needs to be kept available for repayment, for example 20%, which makes it possible to grant credit for amounts far exceeding the total deposits; according to this example, bills of exchange can be discounted or current account overdrafts authorized for amounts equivalent to five times the deposit base. Through deposit and discount banks, only short-term credit is granted. If these same banks grant long-term credit, they are called mixed banks, since they carry out this active operation, which is typical of securities credit institutions, while for the collection of funds they resort to deposits, which is the classic passive operation of deposit and discount banks. Specialized credit institutions include agricultural credit institutions, which provide the working capital necessary for agricultural enterprises, land credit institutions for loans to improve rural property, ship credit institutions, building credit institutions, etc. In Italy today, long-term financing is carried out for the most part through special institutions: IRI, IMI, etc.
4) Due to its characteristics, its scope, and the irreplaceable functions it is called upon to perform, the banking system of every modern country is the most complex and delicate mechanism of the entire economic system. While in every other sector even extensive partial malfunctions lead to imbalances that can be remedied over a more or less long period of time, any friction, not to mention possible financial crises, in the banking structure tends to paralyze or, at the very least, compromise the entire remaining national economic life. This is why in every country central authorities have gradually surrounded the entire structure of the banking system with a more or less dense system of controls, which, although differing in modalities, aim to regulate the supply and distribution of savings and to moralize banking activity.
II. THE BANK IN THE FACE OF CHRISTIAN MORALITY
Christian morality does not object in principle to the various banking activities; indeed, it recognizes and appreciates the services they provide by distributing credit, making even the smallest savers' money productive, giving capital a broader and more regular circulation, facilitating payment and recovery operations, enabling large enterprises that would otherwise be impossible, and so on.It does, however, demand that in the conduct of individual activities the laws of justice be observed; therefore: interest on loans and commissions for services rendered must not exceed the limits of a just price; since the bank is the custodian of others' money, it must avoid squandering it in unsafe or ruinous ventures, as the loss would fall on the saver; it must avoid any fraudulent or deceitful maneuvering in the trading of securities, in the solicitation of purchases or sales, or in monopolistic hoarding; it must guard against abuses by clients, officials, or even the management itself, which may occur in the form of commissions, travel expenses, breaches of confidentiality, or through fraud, harmful operations, falsification of accounts, overdrafts, etc. The precise assessment of morality in this field is made difficult not only by the complexity and entanglement of various activities but also by the conflict between morality and utility, by the easy yielding of the will to the pursuit of gain, by the deplorable moral deformation of the conscience of so many businessmen, and by the marked tendency to rationalize many actions with the convenient pretext that business is business and that one cannot apply the strict criteria of Catholic morality to II.
Hence the need for bankers to possess a well-informed and rightly cultivated conscience, both in civil and religious doctrine, so that they may know how to govern and control themselves in order to live up to the trust placed in them by those who entrust their money to the bank, and to avoid consequences that are often disastrous for families, who might be reduced to ruin, and for nations themselves (v. FALLIMENTO), whose damage or ruin would ultimately affect the saver.
Banquet — Diners with fish and bread. — Fresco in the Catacomb of St. Callistus (late 2nd–early 3rd century).