Evolution of Banking System in the World

A bank is a financial institution licensed to receive deposits and make loans. Two of the most common types of banks are commercial/retail and investment banks. 

A banking system is defined as the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to conduct economic activities such as making a profit or simply covering operating expenses.

The word bank comes from the Italian word banco, meaning a bench since Italian merchants in the Renaissance made deals to borrow and lend money besides a bench. They placed the money on that bench. Elementary financial records are known from the beginning of history. 

The history of banking began with the first prototype banks which were the merchants of the world, who gave grain loans to farmers and traders who carried goods between cities. This was around 2000 BC in Assyria, India and Sumeria. Later, in ancient Greece and during the Roman Empire, lenders based in temples gave loans, while accepting deposits and performing the change of money. Archaeology from this period in ancient China and India also shows evidence of money lending.

The crucial historical development of a banking system to medieval and Renaissance Italy and particularly the affluent cities of Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in the 14th century. Florence, establishing branches in many other parts of Europe. The most famous Italian bank was the Medici Bank, established by Giovanni Medici in 1397.

Apart from these ten listed banks, there are many banking institutions that evolved and also gradually perished over a period of time. But we are currently focusing on these ten famous banks of the world which still survive since hundreds and hundreds of years. Let us gather some more insights about these banks:

1. Banca Monte dei Paschi di Siena

Banca Monte dei Paschi di Siena (Italian pronunciation: [ˈbaŋka ˈmonte dei ˈpaski di ˈsjɛːna]), known as BMPS or just MPS, is an Italian bank. Tracing its history to a mount of piety founded in 1472 (549 years ago) and founded in its present form in 1624 (397 years ago), it is the world’s oldest or second oldest bank, depending on the definition, and the fourth largest Italian commercial and retail bank.

In 1995 the bank, then known as Monte dei Paschi di Siena, was transformed from a statutory corporation to a limited company called Banca Monte dei Paschi di Siena (Banca MPS). The Fondazione Monte dei Paschi di Siena was created to continue the charitable functions of the bank and to be, until the bailout in 2013, its largest single shareholder.

In 2020 Banca MPS had approximately 1,400 branches, 21,000 employees and 3.9 million customers in Italy, as well as branches and businesses abroad. A subsidiary, MPS Capital Services, handles corporate and investment banking.

According to research by Mediobanca and a press release issued by Banco BPM, Banco BPM overtook BMPS as the third largest commercial banking group in Italy in terms of total assets on 31 December 2016, after Banco BPM’s formal formation on 1 January 2017. In 2016–17, BMPS was struggling to avoid a collapse, and was bailed out again by the Italian government in July 2017.

On 5 October 2018, Monte dei Paschi di Siena announced the sale of its Belgian subsidiary, Banca Monte Paschi Belgio (BMPB) to a company participated by funds managed by Warburg Pincus. The sale price was set at €42 million, subject to an adjustment mechanism.

This bank is the oldest bank and as such more history lies within itself.

2. Berenberg Bank

Berenberg bank is the second oldest in the world after Banca Monte Dei Paschi di Siena, and it’s also the world’s oldest merchant bank.

Joh. Berenberg, Gossler & Co. KG, commonly known as Berenberg Bank and also branded as simply Berenberg, is a Hamburg-based multinational full-service investment bank.

The bank has operated continuously since 1590 and is still part-owned by members of the Berenberg-Gossler family. Dutch Protestant brothers, Hans & Paul Berenberg established the Hamburg-based bank in 1590. It grew during a time of prosperity in Hamburg, as the city was becoming a hub for financial and trading activity in the late 16th century.

Like many other merchant bankers, the Berenbergs were originally cloth merchants. The bank’s name refers to Johann Berenberg, his son-in-law Johann Hinrich Gossler and the latter’s son-in-law L.E. Seyler, and has remained unchanged since 1791.

Over the years, the Berenberg bank has stayed remarkably true to its roots.  The personal liability of the owners ensures strict risk management and a high level of management continuity. In the over 430 years of its existence, Berenberg has been run by only 40 managing partners with personal liability.

Berenberg is an owner-managed private bank that to this day is obliged solely to its clients. The high quality of the services they offer regularly scores high marks in various rankings. The desire to grow and develop without losing sight of historical roots has made them what they are today. The Berenberg family and company had branches in Portugal, Italy and London from the 17th century. A branch of the Berenberg family also established the London firm Meyer & Berenberg in the 17th century and were among London’s prominent West Indies merchants. In recent years Berenberg’s London office in Threadneedle Street has grown rapidly to become Berenberg’s second largest office, focusing on investment banking and private banking for the ultra-wealthy.

This bank is the oldest bank and as such more history lies within itself.

3. Sveriges Riksbank

Sveriges Riksbank is the next oldest bank after Berenberg bank. This bank is commonly called as Riksbanken. This is the central bank of Sweden and the third oldest bank in continuous operation – it is also the world’s oldest central bank.

This bank was established in 1668 under the direct control of the Riksdag of Estates (Sweden’s highest authority after the king at the time) to prevent the king from interfering with the bank’s affairs.

Sweden’s previous bank, the Stockholms Banco, failed under the king’s control because it issued too many notes without proper collateral. In 1866, the bank received its current name, Sveriges Riksbank, after a new national legislature was established. Following the global financial crisis of the early 2000s, the bank closed all of its branches in Sweden and outsourced the handling of coins and bills to a private company.

The position of the Riksbank as a central bank dates back to 1897, when the first Riksbank Act was accepted concurrently with a law giving the Riksbank the exclusive right to issue bank-notes. This copyright concluded its role and importance regarding monetary policy in a modern sense, as the exclusive right to issue notes is a condition when conducting monetary policy and defending the value of a currency. Behind the decision were repeated demands that the private banks should cease to issue notes as it was considered that the ensuing profits should befall the general public.

In November 1992, the fixed exchange rate regime of the Swedish Krona collapsed. A few months later, in January 1993, the Governing Board of the Riksbank developed a new monetary policy regime based on a floating exchange rate and an inflation target. These policies were extensively influenced by assistance from the Bank of Canada, which had extensive previous experience controlling inflation, while being a similar small open economy, heavily subject to foreign exchange rate swings.

From 1991 to 1993, Sweden experienced its most severe recession since the 1930s termed the “Swedish banking rescue”. It forced inflation down to around 2%, and inflation continued to be low during the subsequent years of strong growth in the late 1990s.

During the 2000s, the operations and administrative departments were downsized on behalf of the policy departments Financial Stability Department and Monetary Policy Department. A direct consequence of the changing times was that the Riksbank closed down all its branches in Sweden and outsourced the handling of coins and bills to a private company. Today the policy departments are the core of the central bank and they employ about half of the bank’s 350 full-time posts.

This bank is the oldest bank and as such more history lies within itself.

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