In most legal jurisdictions, a
financial institution
A financial institution, sometimes called a banking institution, is a business entity that provides service as an intermediary for different types of financial monetary transactions. Broadly speaking, there are three major types of financial ins ...
is required to obtain a banking licence before it is legally permitted to carry on a
banking business
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
As ban ...
. Besides other requirements, such a business is not permitted to contain in its name words such as ''bank'', ''insurance'', ''national'', etc, unless it holds an appropriate license. Depending on
banking regulations, jurisdictions may offer different types of banking licenses, such as:
* full banking licenses for general banking activities, such as taking deposits from the general public
* international banking licenses (offshore banking licenses), which prohibits any local business activities
* non-banking financial institution (
NBFI) is an institution that provides financial services but has to comply with fewer regulations than one with a full banking license.
License issuance
Licenses are typically issued by a national banking regulator to applicant corporations that meet its banking requirements. The requirements may include minimum capital requirements, minimum number of directors, residence of shareholders, spread of shareholdings, disclosure of beneficial shareholders, besides other matters. These requirements may differ between jurisdictions, and may differ depending on the type of license being sought. Some jurisdictions, sometimes called
tax haven
A tax haven is a term, often used pejoratively, to describe a place with very low tax rates for Domicile (law), non-domiciled investors, even if the official rates may be higher.
In some older definitions, a tax haven also offers Bank secrecy, ...
s, have a reputation for lax or corrupt standards in bank licensing, granting a license, for example, to
shell companies, or to companies with
nominee directors, or with dummy shareholders, etc.
The granting of the license may involve a complex and expensive procedure which may depend on the type of bank license being sought. There are a number of sectors in which banks may be involved. The general bank license allows a bank to engage in all banking activities, such as
retail banking
Retail banking, also known as consumer banking or personal banking, is the provision of services by a bank to the general public, rather than to companies, corporations or other banks, which are often described as wholesale banking (corporate ...
, merchant acquiring, cash management,
asset management
Asset management is a systematic approach to the governance and realization of all value for which a group or entity is responsible. It may apply both to tangible assets (physical objects such as complex process or manufacturing plants, infrastr ...
and
trading
Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market (economics), market.
Traders generally negotiate throu ...
. An applicant can apply for a limited banking license, such as an
offshore bank
An offshore bank is a bank that is operated and regulated under international banking license (often called offshore license), which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to ...
ing license.
Banking licenses in the United States
Most
state legislatures in the United States ban general corporations from accepting banker's deposits, which covers any service where a general corporation acts as a funds drawee that transfers current funds (i.e., credit payable upon demand) to make payments as a substitute for coins on behalf of an account holder. Historically, in some states, this ban did not extend to a sole proprietor acting as a banker.
One argument for justifying the policy of requiring banking licenses under the
U.S. Constitution is that bankers credit sometimes interferes with the regulation of the value of coins, and therefore it is necessary and proper to make laws which regulate banking.
U.S. states tend to include a license to conduct the banking business as part of the standard terms of the corporate franchise in the state bank charters of incorporation. The license may be implied by a reference in the charter application to the bank being created "under" the state banking law. Federal depository institutions such as
National Banks, or
federally chartered credit union
A credit union is a member-owned nonprofit organization, nonprofit cooperative financial institution. They may offer financial services equivalent to those of commercial banks, such as share accounts (savings accounts), share draft accounts (che ...
s derive their authority from federal statutory charter law. Opening or operating a bank also requires regulatory compliance, which may include
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is a State-owned enterprises of the United States, United States government corporation supplying deposit insurance to depositors in American commercial banks and savings banks. The FDIC was cr ...
(FDIC) approval for coverage and opening an account at a
Federal Reserve Bank (or otherwise establishing a facility to settle checks via settlement with Federal Reserve Bank issued credit).
If a bank wishes to perform any substantial
fiduciary
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (legal person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, ...
services, such as trust department services, or acting as a
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
holding
intermediary
An intermediary, also known as a middleman or go-between, is defined differently by context. In law or diplomacy, an intermediary is a third-party beneficiary, third party who offers intermediation services between two parties. In trade or barte ...
, then the bank must apply for an additional special license for trust powers. Depending on the specifics of the bank charter, these licenses are available variously from FDIC,
Federal Reserve Board of Governors, or state regulators. Another option for such a bank is to create a State-chartered Trust Company and hold it as a subsidiary corporation.
See also
*
Finance
Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...
References
{{DEFAULTSORT:Banking License
Bank regulation