Even if you are lending money out at a rate of interest, or making investments on the stock market, an individual, or an institution, cannot just declare themselves a bank. There are laws and government regulations that determine whether an institution can call itself a bank or not. The legalities differ depending on what country or jurisdiction you are in, but in general, a commercial bank is regulated by the government, and requires a license to operate.
Requirements for issuing a bank license vary, but they typically include the following:
– A Minimum Capital Requirement
– A Minimum Capital Ratio
– Certain requirements for the banks controllers, directors, and senior officers (“Fit and Proper” requirements)
– Approval of the bank’s business plan
For the purposes of regulation, acceptance of deposits is usually a definition of the business of banking. This is true even if the deposits are not repayable to the customer on demand. Money lending, in and of itself, is not always included in the general definition of banking.
In contrast to other regulated industries, the regulator – in this case, the government – is sometimes allowed to participate in the market it is regulating. For instance, a central bank that issues bank notes is owned by the government, yet it is, by definition, a part of the market economy. This is true in the United States, but in some countries, for instance the UK, you may have two different banks issuing competing notes with a separate entity, in this case the Financial Services Authority – licensing banks and acting as arbiter.
Some entities are partly or wholly exempt from license requirements, and can still participate in banking activities. For example, building societies and credit unions are not legally banks, but they are still regulated under a different system of regulation.