BANKING. — By b., in general, are meant those institutions which, although they do not directly produce material goods or services capable of satisfying human needs (agriculture and industry in the broad sense), do not physically transfer goods over distances (transport), nor exchange and distribute them among consumers (commerce), nevertheless contribute to the entire economic activity of society, on the one hand by providing the means of payment indispensable for transactions and on the other by supplying that sui generis immaterial good which is credit.
1) The two principal functions performed precisely by b. are the monetary and the credit functions. The monetary function consists in making available to the public instruments of payment that are more convenient, more manageable, and less costly to transfer than metallic money; these instruments are represented by banknotes and checks. Historically, b. began by exercising this function: in return for the deposit by private individuals of metallic coins of the most varied kinds and with the most diverse content of fine metal, the first public banks adopted the practice of issuing certificates of corresponding value, expressed in an established unit of account. Subsequently, these certificates assumed the characteristic form of banknotes, whose issuance eventually became concentrated in one or a few b. (issuing b.). At present, plurality of issuing b. exists only in the United States of America, where, however, a special body, the Federal Reserve Board, coordinates and supervises 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 amount of the deposits in question. The mass of checks in circulation is usually defined as bank money.
Banknotes may be issued not only against deposits of metallic money but also as a result of other operations, so that a portion of the notes may no longer have metallic backing. Similarly, depositors may be granted the right to draw checks for an amount exceeding their deposits, as may economic agents who have made no prior deposit whatsoever. In all these cases the b. performs the credit function, that is, it provides credit to parties intending to use it for productive or consumption purposes. Strictly speaking, the credit function may be exercised in two ways: on the one hand, by granting those who request it the use of the savings flowing into and collected by b. through deposits; on the other, by creating new means of payment in the form of the issuance of banknotes and the granting of the right to draw checks beyond what would be permitted by metallic backing and by the volume of deposits. Credit was previously defined as a sui generis immaterial good, since, in the classical tripartition of the factors of production (natural factors, labor, capital), it is from credit that one draws the capital needed for production, in order to supplement that obtained insufficiently through business self-financing.
A third function of b., related to the credit function, is the investment function of capital, 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, b. procure capital, which they then transfer to those who need it by means of active operations.
The principal active operations consist of the discounting of instruments, usually bills of exchange, of advances against the pledge of securities or merchandise, of current-account openings, etc. In the discount operation, which represents the most widespread and important form of granting credit, the b. agrees, upon delivery of an instrument, the bill of exchange, to pay a sum equivalent to the amount stated on the instrument, less a certain sum. This sum, which constitutes the interest accruing until the time when the loaned amount is repaid to the b., is what is usually called discount in the strict sense; the increase or decrease of the discount rate, regulated by the central b., making recourse to credit more or less costly, serves precisely to restrict or expand II. When the owners of securities or merchandise are advanced the price they will subsequently obtain from the securities or merchandise themselves, the loans made by the b. are called advances. Loans to owners of real property are granted in the form of mortgage loans. When none of these operations is used, credit may be granted through a simple current-account opening, by which the beneficiary is given the right to draw checks on the b. up to a specified amount; for the other operations as well, the technical form in which the credit is utilized is through the opening of current accounts.
The principal passive operations consist of the issuance of banknotes and the acceptance of deposits, as well as the so-called rediscount. By issuing banknotes, the b. obtains capital in the form of metallic money or fine metal and gives in exchange what is legally a genuine credit instrument, namely, an unconditional promise to pay on demand and to bearer, for the amount indicated, the value previously received. However, not only is this operation today carried out exclusively by issuing b., but with the establishment of forced legal tender, which compels the public to accept banknotes without any right to convert them into metallic money or fine metal, the entire operation assumes an appearance and characteristics entirely different from those typical of II. Since at present no country in the world has convertibility of banknotes, nor is a return to such a system foreseeable in the future, and since, moreover, issuance is exclusively restricted to one or, at most, very few b., we may attach to the issuance of banknotes, as a passive operation, a merely conceptual and historical significance.
The typical passive operation remains instead that relating to deposits, through which the b. collects capital to be used for granting credit or making investments or, more generally, carrying out active operations. The sums deposited by the public, while remaining at the disposal of the b., will be returned in their exact amount according to predetermined procedures and at a predetermined maturity. The depositors, however, receive compensation (interest), which represents the price for the b.’s use of the funds paid into it; interest can be paid because the b., in turn, earns profits through the employment of the deposited funds.
Another typical passive operation is what is usually called rediscounting. The b. concerned transfers bills of exchange that it has previously discounted to another b., usually the issuing institution, in order to realize their amount through a new discount. In this way, the issuing institution carries out an active financing operation with respect to the b. that has presented the bills of exchange.
3) The term b. is extremely generic, being applied both to banks properly so called and to credit institutions. Strictly speaking, banks properly so called would be those bodies that exercise the monetary function alone, whereas credit institutions would be specialized in fulfilling the credit function. On the basis of this distinction, therefore, the former would include issuing banks and deposit and discount banks, while the latter would comprise institutions of movable credit and the so-called mixed banks. In practice, this functional distinction is unclear and, indeed, it is highly doubtful that it can be applied. For although it is true that credit institutions perform an exclusively credit function, banks properly so called also end up exercising the same function, albeit in different forms and ways. This occurs because the issuing bank issues notes in excess of its metallic reserves, and because deposit and discount banks grant the right to draw checks for amounts greater than the funds deposited.
It follows that the classification of banks and credit institutions must be made according to another criterion—practically, that of the actual activity carried out by each banking body, with particular regard to the type of operations to which each is devoted. As for issuing banks, of which we have already spoken, it remains to say that in the modern economy they are entrusted with regulating the entire monetary and credit mechanism of a country and for this reason are also called central banks. Deposit and discount banks, after collecting capital through the typical deposit operations,
proceed to distribute it, above all by lending it to those who present bills of exchange for discounting. Since, given the succession of deposits and withdrawals, only a certain percentage of deposits must be kept available for repayment—e.g., 20%—it becomes possible to grant credit for amounts much greater than the total deposits; according to the example, bills of exchange may be discounted or current-account facilities authorized for sums equivalent to five times the mass of deposits. Through deposit and discount banks, credit is granted exclusively for short-term maturities. If these same banks grant long-term credit, they are called mixed banks, since they carry out this active operation, which is typical of institutions of movable credit, while they obtain funds through deposits, the classic passive operation of deposit and discount banks. Specialized credit institutions include agricultural credit institutions, which provide the working capital needed by agricultural enterprises; land-credit institutions, for loans to improve rural property; naval-credit institutions; building-credit institutions; etc. In Italy, long-term financing is today carried out for the most part through special institutions: IRI, IMI, etc.
4) In view of its characteristics, its scope, and the irreplaceable functions it is called upon to perform, the banking organization of every modern country is the most complex and delicate mechanism in the entire economic system. Whereas in every other sector even extensive partial disruptions lead to imbalances that may be remedied over a more or less lengthy period of time, every friction—not to mention possible collapses—in the banking structure always tends to paralyze or, at the very least, to compromise the functioning of all the rest of national economic life. This is why, in every country, the central authorities have gradually surrounded the entire structure of the banking organization with a more or less dense system of control which, although differing in its procedures, aims to regulate the supply and distribution of savings and to moralize banking activity.
J. M. Keynes, Trattato della moneta, Italian translation, Milano 1932–1934; A. De Viti De Marco, La funzione della b., Torino 1934; F. Vito, La moneta, il credito e i sistemi monetari attuali, 7th ed., Milano 1948. Ercole Calcaterra
II. BANKING IN RELATION TO CHRISTIAN MORALITY
Christian morality has nothing in general to object to regarding the various banking activities; indeed, it recognizes and appreciates the services they provide by distributing credit, making even the money of the smallest savers productive, giving capital a broader and more regular circulation, facilitating payment and collection operations, and making possible large enterprises that otherwise could not be undertaken.It does, however, demand that the laws of justice be observed in the execution of individual activities; therefore: interest on loans and commissions for services rendered must not exceed the limits of a just price; since the b. is the custodian of other people's money, it must avoid pouring it into insecure or ruinous ventures, because the loss would fall upon the saver; it must avoid every fraudulent or deceitful maneuver in the trading of securities, in proposals for purchases or sales, and in monopolistic hoarding; it must guard against abuses on the part of clients, officials, and the management itself, which may occur in matters of commissions, travel expenses, and confidential information; or through fraud, harmful transactions, falsification of balance sheets, uncovered checks, etc. The accurate assessment of morality in this field is made very difficult not only by the complexity and entanglement of the various activities, but also by the conflict between morality and utility, by the will's easy surrender in the face of profit; by the deplorable moral deformation of the consciences of so many business people, and by the pronounced tendency to accommodate oneself, to justify many actions with the specious pretext that business is business and that whoever wishes to achieve anything cannot possibly apply the rigid criteria of Catholic morality to II.
Hence the need for the banker to possess a well-enlightened and properly cultivated conscience, both in civil and religious doctrine, so that he may master himself and his affairs, respond to the trust of those who place their confidence in the b., and avoid often disastrous consequences for families, which would be cast into poverty, and for nations themselves (v. FALLIMENTO), whose loss or disaster would ultimately be passed on to the saver.