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Bank License Requirements and Functions

The document discusses the requirements for obtaining a bank license, which typically include minimum capital, capital ratio requirements, and fit and proper standards for directors and officers. It also outlines the key economic functions of banks, such as issuing money, facilitating payments, credit intermediation, credit quality improvement, and maturity transformation. Finally, it examines some of the implied contractual rights and obligations in the bank-customer relationship, such as the bank promptly collecting deposited checks, combining accounts, asserting liens on deposits, and protecting customer privacy.

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ANKIT SINGH
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13 views3 pages

Bank License Requirements and Functions

The document discusses the requirements for obtaining a bank license, which typically include minimum capital, capital ratio requirements, and fit and proper standards for directors and officers. It also outlines the key economic functions of banks, such as issuing money, facilitating payments, credit intermediation, credit quality improvement, and maturity transformation. Finally, it examines some of the implied contractual rights and obligations in the bank-customer relationship, such as the bank promptly collecting deposited checks, combining accounts, asserting liens on deposits, and protecting customer privacy.

Uploaded by

ANKIT SINGH
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

The requirements for the issue of a bank licence vary between jurisdictions but

typically include:

1. Minimum capital
2. Minimum capital ratio

'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or
senior officersThe requirements for the issue of a bank licence vary between
jurisdictions but typically include:

3. 'Fit and Proper' requirements for the bank's controllers, owners,


directors, and/or senior officers
4. Approval of the bank's
5. Business plan as being sufficiently prudent.

The economic functions of banks include:

1. Issue of money, in the form of banknotes and current accounts subject to


cheque or payment at the customer's order. These claims on banks can act as
money because they are negotiable and/or repayable on demand, and hence
valued at par. They are effectively transferable by mere delivery, in the case of
banknotes, or by drawing a cheque that the payee may bank or cash.
2. Netting and settlement of payments – banks act as both collection and
paying agents for customers, participating in interbank clearing and settlement
systems to collect, present, be presented with, and pay payment instruments.
This enables banks to economise on reserves held for settlement of payments,
since inward and outward payments offset each other. It also enables the
offsetting of payment flows between geographical areas, reducing the cost of
settlement between them.
3. Credit intermediation – banks borrow and lend back-to-back on their own
account as middle men
4. Credit quality improvement – banks lend money to ordinary commercial
and personal borrowers (ordinary credit quality), but are high quality borrowers.
The improvement comes from diversification of the bank's assets and capital
which provides a buffer to absorb losses without defaulting on its obligations.
However, banknotes and deposits are generally unsecured; if the bank gets into
difficulty and pledges assets as security, to raise the funding it needs to continue
to operate, this puts the note holders and depositors in an economically
subordinated position.
5. Maturity transformation :-Banks borrow more on demand debt and short
term debt, but provide more long term loans. In other words, they borrow short
and lend long. With a stronger credit quality than most other borrowers, banks
can do this by aggregating issues (e.g. accepting deposits and issuing
banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes),
maintaining reserves of cash, investing in marketable securities that can be
readily converted to cash if needed, and raising replacement funding as needed
from various sources (e.g. wholesale cash markets and securities markets).

Banking law is based on a contractual analysis of the relationship between the


bank (defined above) and the Customer:- defined as any entity for which the
bank agrees to conduct an account.

The law implies rights and obligations into this relationship as follows:

11.. The bank agrees to promptly collect the cheques deposited to the
customer's account as the customer's agent, and to credit the proceeds to the
customer's account.

12 . The banks have a right to combine the customer's accounts, since each
account is just an aspect of the same credit relationship.

13. The bank has a lien on cheques deposited to the customer's account, to
the extent that the customer is indebted to the bank.
14. The bank must not disclose details of transactions through the customer's
account—unless the customer consents, there is a public duty to disclose, the
bank's interests require it, or the law demands it.

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