Value and Capital Management: A Handbook for the Finance and Risk Functions of Financial Institutions

Chapter 10Banking

This chapter outlines the “rules of the game” (or generic strategies) and core competencies for creating value in retail and commercial banking, beginning with a brief history of the industry and a summary of its economic rationale.

History¹

The earliest bank-like activities included deposit taking, lending and payment services. These services were often motivated by “merchant banking” or (commercial trading) on behalf of the “bank's” own account but later morphed into services provided by institutions which did not have a direct commercial interest in the underlying transactions.

Around 2000 BC in Assyria and Babylonia, wealth in the form of commodities (e.g., grain and metal) was deposited in temples and treasuries against a fee. From this wealth, loans were made, for example in the form of seed-grain to be repaid with interest following the harvest. These agreements were documented in clay tablets called tokens, later replaced by ledgers to record production and exchanges. Deposit taking and lending reached a level of maturity sufficient to be regulated in the Code of Hammurabi in circa 1750 BC. Similar practices are found in Egypt around the 18th century BC.

Later, the role of temples extended to include payment services, either through an account in a banking network or through letters of credit or bills of exchange. Beginning with the reign of the Greek Ptolemy I (305–284 BC), government granaries were transformed into a network of grain banks centralized ...