Bank being the custodian of public money cannot act negligently in disbursing

credit facility to the accused or identified loan defaulter- pointing out the
argument in the global context

An Assignment Paper (II) Submitted to Barrister Arife Billah (Lecturer, North

South University, Dhaka) for the Degree of BBA in the School of Business

Arafat Islam
ID: 111 0247 030
Course: LAW200 (Business Law)
Section: 1, Semester: Fall 2014

10 December, 2014

Declaration
i.

No portion of the work referred to in this assignment paper has been submitted for
another degree or qualification of this or any other University or other Institution of
Learning.

And
ii.

Copyright in the text of this assignment paper rests with the Author. Copies (by any
process) either in full, or of extracts, may be made only in accordance with
instructions given by the Author. This page must from part of any such copies made.
Further copies (by any process) of copies made in accordance with such instructions
may not be made without the permission (in writing) of the Author.
The ownership of any Intellectual property rights, which may be described in this
paper, is vested in the North South University, Dhaka, subject to any prior agreement
to the contrary, and may not be made available for use by third parties without the
written permissions of the University, which will prescribe the terms and conditions
of any such agreement.

Acknowledgement
First of all I would like to thank Almighty Allah. Without His bless I would not be able to
complete this paper within due time. Then in this earth I deeply thank my father MD. Nazrul
Islam for his continuous help and motivation in completing this paper. Each and every confusion
I faced, he removed that with his deliberate knowledge. Then I would like to thank my course
instructor Barrister Arife Billah for giving me the opportunity to learn and share. Then thanks to
all of those people who were directly and indirectly involved with this paper.

ii

Title: Bank being the custodian of public money cannot act negligently in disbursing credit
facility to the accused or identified loan defaulter- pointing out the argument in the global
context.

Abstract
This essay discusses the fact that banks (whether public or private or retail or commercial or
investment) have some responsibilities towards the public. They cannot act negligently and must
bear some ethical rules. Being the custodian of public money, it is them who need to posse the
sense to protect public wealth. Thinking from legal perspective, 1bank is an officially chartered
institution empowered to receive deposits, make loans, and provide checking and savings
account services, all at a profit. In the United States banks must be organized under strict
requirements by either the Federal or a state government. Banks receive funds for loans from the
Federal Reserve System provided they meet safe standards of operation and have sufficient
financial reserves. Bank accounts are insured up to $100,000 per account by the Federal Deposit
Insurance Corporation. Most banks are so-called "commercial" banks with broad powers. In the
East and Midwest there are some "savings" banks which are basically mutual banks owned by
the depositors, concentrate on savings accounts, and place their funds in such safe investments as
government bonds. Savings and Loan Associations have been allowed to perform some banking
services under so-called deregulation in 1981, but are not full-service commercial banks and lack
strict regulation. Mortgage loan brokers, and thrift institutions (often industrial loan companies)
are not banks and do not have insurance and governmental control. Severe losses to customers of
1

(n.d.). Retrieved December 9, 2014, from The Free Dictionary by Farlex: http://legaldictionary.thefreedictionary.com/bank

iii

these institutions have occurred in times of economic contraction or due to insider profiteering or
outright fraud. Credit Unions are not banks, but are fairly safe since they are operated by the
members of the industry, union or profession of the depositors and borrowers. So it is seen that
banks posse the role of the custodian of public money and wealth. There is a saying that with
great powers come great responsibility. Here banks have that great power so they must have
great responsibility as well. It is a common phenomenon that banks give loans and before that
they check the worthiness of the loan. But do they actually judge the worthiness of how they
should be? If we think that they do then we couldnt find the greatest loan defaulting cases on
this earth. However, we still can assume that there were no faults from the banks perspective and
still there is the situation of defaulting and unfortunately banks give loan to the same party or
parties that have the defaulting case before. So according to public rights how ethical this act is?
Is this even legally correct? These types of questions answer would be found in this paper from
the global perspective as banks are no more a local factor anymore. Because of globalization one
decision in one area affects another reason as well where the bank has another branch. First of all
a common definition of a bank is presented in this paper followed by the legal definition. Then
the responsibilities of a bank are described followed by the legal bindings. Analytical discussions
are there with some global examples. Finally the paper is concluded with personal opinions.

Keywords: banks as public custodian, banks, financial institutions, global economic crisis and
banks, banks negligence, credit default, loan, global loan defaulting.

iv

Table of Contents
Introduction.

7-9

Conceptual Definition of a Bank.

9-10

Legal Definition of a Bank..

10

Bank Customer Relationship...

11-12

Duties of the Bank..

12-16

Banks and the Banking Code.

16-17

General Obligations of the Bank.

18-19

How Banks Raise Capital? An answer needed to prove the main custodianship of
public money..

19-23

The factors a bank sees before sanctioning a loan to a borrower

23-24

Global Context:
Is money really safe in Banks? An example from Cyprus...

25-26

Bangladesh example and the effects- Sonali Bank and Hallmark Scandal.

27-28

Conclusion and Recommendations.

28-29

Bibliography

29-31

Page | 5

ABBREVIATIONS

CB

Central Bank

FED

Federal Reserve

Page | 6

Introduction
A bank is a financial intermediary that accepts deposits and channels those deposits into lending
activities, either directly by loaning or indirectly through capital markets. A bank links customers
that have capital deficits and customers with capital surpluses. Due to their importance in the
financial system and influence on national economies, banks are highly regulated in most
countries. Most nations have institutionalized a system known as fractional reserve banking,
under which banks hold liquid assets equal to only a portion of their current liabilities. In
addition to other regulations intended to ensure liquidity, banks are generally subject to
minimum capital requirements based on an international set of capital standards, known as the
Basel Accords. Banking in its modern sense evolved in the 14th century in the rich cities of
Renaissance Italy but in many ways was a continuation of ideas and concepts of credit and
lending that had its roots in the ancient world. In the history of banking, a number of banking
dynastiesnotably the Medicis, the Fuggers, the Welsers, the Berenbergs, and the Rothschilds
have played a central role over many centuries. The oldest existing retail bank is Monte dei
Paschi di Siena, while the oldest existing merchant bank is Berenberg Bank. From financial
pespective we can describe Bank as a financial institution licensed as a receiver of deposits.
There are two types of banks: commercial/retail banks and investment banks. In most countries,
banks are regulated by the national government or central bank.
Commercial banks are mainly concerned with managing withdrawals and deposits as well as
supplying short-term loans to individuals and small businesses. Consumers primarily use these
banks for basic checking and savings accounts, certificates of deposit and sometimes for home
mortgages. Investment banks focus on providing services such as underwriting and corporate
reorganization to institutional clients.
Page | 7

While many banks have a brick-and-mortar and online presence, some banks have only an online
presence. Online-only banks often offer consumers higher interest rates and lower fees.
Convenience, interest rates and fees are the driving factors in consumers' decisions of which
bank to do business with. As an alternative to banks, consumers can opt to use a credit union.
Banks give different types of credit facility to public or government. Credit Facility is an
agreement with bank that enables a person or organization to be taken credit or borrow money
when it is needed. All types of credit facilities may broadly be classified into two groups on the
basis of Funding such as 1. Fund Base Credit like Loan ( refers to credit facility that is repayable
in a definite period), Cash Credit (refers to credit facility in which borrower can borrow any time
with in the agreed limit for certain period for their working capital need), Over Draft (allows a
current account holder to withdraw in excess of their credit balance up to a sanctioned limit),
Packing Credit (a credit facility which sanctioned to an exporter in the Pre-Shipment stage),
Bill Discounted , Bill Purchased , Advance against hypothecation of Vehicles ( Transport Loan) ,
House Building Loan , Consumer Loan , Agriculture Loan -Farming -Non Farming , Consortium
Loan , Lease Financing , Hire Purchase ,

Import Financing Loan Against Imported

Merchandise (LIM) Payment Against Document (PAD) and 2. Non Fund Base credit like
Letter Of Credit, Bank Guarantee, Buyer Credit, Suppliers Credit etc.
Before giving this financial facility a bank judges the worthiness and validity of an applicant.
However, not all the calculation results in correct afterwards. Loan defaulters occur and banks
take necessary steps then. Unfortunately it is true that although banks found an applicant that
previously defaulted and still give financial facility which is against the basic banking rules and
ethics as well. Defaulting means in finance that a failure to meet the legal obligations (or
conditions) of a loan, for example when a home buyer fails to make a mortgage payment, or
Page | 8

when a corporation or government fails to pay a bond which has reached maturity. A national or
sovereign default is the failure or refusal of a government to repay its national debt. So in general
we can expect that banks will stop giving the credit facilities to the potential defaulter or who
have previously defaulted and bear the potentiality to default again. It should be the main act of
the banks. As the money banks use to provide different types of loans and financial facilities
come from the banks customer accounts. Here the customers are the common people or even the
government itself. In fact government also receives money from the public in general. So the
responsibility of protecting the publics money comes into question. Banks cannot act willingly
or illegally or whatever the way they want for giving the credit facility as they hold the reserve of
public wealth and if anything goes wrong it is the people or the customer of the banks who have
to bear the consequences.
The purpose of this paper is to state that a bank cannot act negligently while giving loans to
accused or identified defaulters as they are the custodians of public money and they have some
contractual and ethical duties.

Conceptual Definition of a Bank

The definition of the term bank was a judicial debate in the past, owing to the lack of a
satisfactory statutory definition2. However, today, reference to judicial interpretations of the said
term would not be necessary, since the Banking Act No. 30 of 1988 [As amended] in Sri Lanka
defines the term banking business as:

See, Commissioner of Income Tax v. The Bank of Chettinad 47 NLR 25; The Bank of Chettinad v. Commissioner of
Income Tax 49 NLR 409 (PC).

Page | 9

the business of receiving funds from the public through the acceptance of money
deposits payable upon demand by cheque, draft, order or otherwise, and the use of such
funds either in whole or in part for advances, investments or any other operation either
authorized by law or by customary banking practices

Legal Definition of a Bank

According to US law for purposes of sections 3582 and 584, the term bank means a bank or
trust company incorporated and doing business under the laws of the United States (including
laws relating to the District of Columbia) or of any State, a substantial part of the business of
which consists of receiving deposits and making loans and discounts, or of exercising fiduciary
powers similar to those permitted to national banks under authority of the Comptroller of the
Currency, and which is subject by law to supervision and examination by State, Territorial, or
Federal authority having supervision over banking institutions. Such term also means a domestic
building and loan association.

Source
(Aug. 16, 1954, ch. 736, 68A Stat. 202; Pub. L. 87722, 5,Sept. 28, 1962, 76 Stat. 670; Pub. L. 94455, title XIX,
1901(c)(5),Oct. 4, 1976, 90 Stat. 1803.)
Amendments
1976Pub. L. 94455substituted or of any State for of any State, or of any Territory after District of
Columbia) and struck out Territorial after examination by State.
1962Pub. L. 87722substituted authority of the Comptroller of the Currency for section 11(k) of the Federal
Reserve Act (38 Stat. 262; 12 U.S.C. 248 (k)).

Page | 10

Bank Customer Relationship

The relationship of bank and customer is one of contract4. According to Paget, this relationship
consists of a general contract, together with special contracts. The former is basic to all
transactions and whereas the latter could arise only as they are brought into being in relation to
specific transactions or banking services5.
The distinction between general contract on the one hand, and special contracts on the other,
becomes useful when determining the duties and obligations of the bank from the standpoint of
the customer.
Unless contractually bound, banks are generally free to decide whether they will provide
particular services to their customers or not6. A bank is obliged to perform the ordinary services
of banking arising out of the general contract sometimes, even without the request of the
customer.
Conversely, in the case of special contracts, a bank would not be obliged to perform the
services arising out of such special contract, unless specially agreed between the parties [i.e. the
bank and the customer] which would generally be outside the scope of the general contract.
Examples of some services arising out of special contracts would most probably include
standing orders, direct debits, bankers drafts, letters of credit and foreign currency for travel
abroad, etc7.

Foley v. Hill (1848) 2 HL Cas 28.

M. Hapgood, Pagets Law of Banking,(13th ed.) London: LexisNexis Butterworths, 2007 at p.145.
6
R. Cranston, Principles of Banking Law,(2nd ed.) Clarendon: Oxford University Press, 2002 at p.130
7
M. Hapgood, Pagets Law of Banking,(13th ed.) London: LexisNexis Butterworths, 2007 at p.145.
5

Page | 11

In most of the circumstances, the relationship of banker and customer would depend entirely or
mainly upon implied contract8. Implied terms would be important and necessary for the bankcustomer contracts due to couple of reasons.
The general contracts between banks and their customers would hardly incorporate all the terms
in writing, whereas special contracts may commonly incorporate printed terms and conditions of
the bank9.
It is unlikely that customers would agree to all the terms when entering into a general contract
with their banks, such as opening an account. Moreover, it would be impracticable to reduce all
the terms agreed between the bank and the customer to writing. Above all, there may be implied
terms in the bank-customer contracts, which are peculiar to the banking practice, so that they
cannot be displaced without affecting business efficacy.

Duties of the Bank

The classic exposition of the nature of the bank-customer relationship in Joachimsonv. Swiss Bank
Corp10. by Lord Justice Atkin gives a lucid account of the basic common law duties of a bank towards its
customer, arising out of the general contract between the bank and the customer. His Lordship stated:
The bank undertakes to receive money and to collect bills for its customers account. The
proceeds so received are not to be held in trust for the customer, but the bank borrows the
proceeds and undertakes to repay them. The promise to repay is to repay at the branch of the
bank where the account is kept, and during banking hours. It includes a promise to repay any
8

Joachimson v. Swiss Bank Corp.[1921] 3 KB 110 at 117.

M. Hapgood, Pagets Law of Banking,(10th ed. Indian) London: Butterworths, 1989 at p.159.Seealso, R. Cranston,
Principles of Banking Law,(2nd ed.) Clarendon: Oxford University Press, 2002 atp.133.
10
[1921] 3 KB 110.
9

Page | 12

part of the amount due against the written order of the customer addressed to the bank at the
branch, and as such written orders may be outstanding in the ordinary course of business for
two or three days, it is a term of the contract that the bank will not cease to do business with the
customer, except upon reasonable notice. The customer on his part undertakes to exercise
reasonable care in exercising his written orders as not to mislead the bank or to facilitate
forgery. I think it is necessarily a term of such a contract that the bank is not liable to pay the
customer the full amount of his balance until he demands payment from the bank at the branch at
which the current account is kept. 11

Accordingly, the main duty of a bank towards its customer is to repay the money borrowed from
the customer. However, this duty is subject to certain conditions aimed at realities of banking
practice and business efficacy. It is an implied term in the contract between the bank and its
customer that the bank is not liable to repay the customer until demand is made for repayment.
Until then, there is no presently due debt owed by the bank to the customer. Although, an oral
demand would be technically sufficient to be termed as a valid demand, the normal practice
adopted by banks is to consider a cheque or passbook as a demand, apart from the e-banking and
mobile-banking methods.
It had been observed in the past that the consequence of justifying the customer in demanding
repayment at any branch of the bank, irrespective of where his account is kept would be a
subversion of the established and legally recognized principles of banking12. Hence, the customer
was required to make the demand for repayment from the bank at the branch where the
customers account was maintained. However, as seen in the present context, banks may contract
with its customers so as to enable the customers to withdraw money or make demand for
11
12

[1921] 3 KB 110 at 127.

See, M. Hapgood, Pagets Law of Banking,(10th ed. Indian) London: Butterworths, 1989 at p.162.

Page | 13

repayment from any branch of the bank. In such circumstances, there would be an added
obligation created on the banks to conform to what they have contracted with their customers.
A banks obligation for repayment to the customer arises only during banking hours. However,
this may extend to a reasonable margin after the banks advertised closing time13. Certain banks
do now open specified branches on public holidays and this may create a contractual duty on
such banks to transact business on public holidays at branches which have announced banking
hours on such holidays.
The bank-customer relationship had been historically held as essentially a debtor-creditor
relationship14. However, the nature and consequences of the bank-customer relationship differs
largely from the contractual relationship between an ordinary debtor and creditor. Even, in the
decision of Foley v. Hill 15where it was held that the bank-customer relationship is essentially a
debtor-creditor relationship, Lord Cottenham observed that:
money placed in the custody of a banker is, to all intents and purposes, the money of the
banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is
not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous
speculation; he is not bound to keep it or deal with it as the property of his principal; but
he is, of course, answerable for the amount, because he has contracted, having received
that money, to repay to the principal, when demanded, a sum equivalent to that paid into
his hands16

13

Baines v. National Provincial Bank Ltd.(1927) 96 LJKB 801.

Foley v. Hill [1848] 2 HL Cas 28, 9 ER 1002.
15
2 HL Cas 28, 9 ER 1002.
16
at 9 ER 1005-1006.
14

Page | 14

In Joachimson v. Swiss Bank Corp. 17Lord Justice Atkin rejected altogether the contention that
the relationship of bank and customer is that of debtor and creditor with superadded obligations,
and that the customer enjoys the right of a lender to sue for his debt whenever he pleases. Lord
Justice Bankes reached the same decision as Lord Justice Atkin, whilst adhering to the notion of
implied superadded obligations. However, it has been submitted that Lord Justice Atkins
concept of a single contract is the more convincing one and that it is the said concept which has
prevailed over the time.18
Ross Cranston contends that;
Even on its own terms the debtor-creditor characterization did not accord 100 percent
with reality...Rather, it was established in number of cases that the obligation of
the bank was not a debt pure and simple, such that the customer could sue for it without
warning, but rather a debt for which demand had to be made, and at the branch at which
the account was kept.

19

The law now recognizes that the relationship of bank and customer is not merely that of debtor
and creditor with superadded obligations, especially in the forte of the modern banking practice.
It would be unrealistic to oblige the bank, like the ordinary debtor, to seek out its creditor, or to
repay immediately when due. This would mean repaying by the bank to its customers directly
after the customers had deposited the money into their respective accounts. It would also be

17

[1921] 3 KB 110.
M. Hapgood, Pagets Law of Banking,(13th ed.) London: LexisNexis Butterworths, 2007 at p.149.
19
R. Cranston, Principles of Banking Law,(2nd ed.) Clarendon: Oxford UniversityPress, 2002 at p.132.
18

Page | 15

unrealistic to permit customers, like ordinary creditors, to demand repayment of the deposits
from their banks, at any time and any place.20
The distinction between the bank-customer relationship and the relationship that of debtor and
creditor, is indispensable in giving contracts between bank and customer business efficacy.
Lord Justice Bankes observed in Joachimson v. Swiss Bank Corp:21
It seems to me impossible to imagine the relation between banker and customer, as it
exists today, without the stipulation that, if the customer seeks to withdraw his loan, he
must make application to the banker for it.
Hence, the jurisprudential basis of the distinction between ordinary debtor-creditor relationship
and bank-customer relationship is rather a one of practical business necessity.22

Banks and the Banking Code

23

The Banking Code is a set of rules, regulations and guidelines which set a standard of good

practice with respect to banking practice. The code presents commitments of the bankers to their
customers. The key commitments state that the banks must act fairly and reasonably and will not
mislead the customer in any circumstances. The key commitments promise to give the customer
clear information with respect to his or her bank account including all terms and conditions and
interest rates. The commitment also promises to keep the customer informed about the changes

20

R. Cranston, Principles of Banking Law,(2nd ed.) Clarendon: Oxford University Press, 2002 atp.132.
[1921] 3 KB 110at 121.
22
See, R. Cranston, Principles of Banking Law,(2nd ed.) Clarendon: Oxford University Press, 2002 atp.132.
23
What are the obligations between the banker and the customer? (n.d.). Retrieved December 2014, 9, from In
Brief: http://www.inbrief.co.uk/personal-finance/bank-obligations-to-customers.htm
21

Page | 16

to the charges, terms and conditions by sending regular updates and bank statements. The Code
also obliges the bank to deal with all problems as efficiently as possible. The bank must also
keep all the information private and confidential in order for the customer to exercise secure
banking. All staff must be aware of the commitments stated in the Banking Code and must also
perform them. Given that there is a contractual relationship between the banker and the
customer, the obligations and customers rights stated in that contract must be in a clear and
plain language. If there is a significant change in terms and conditions the customers are entitled
to receive a new copy of the terms and conditions so that they are fully aware of the change. The
Banking Code is applicable to personal banking customers. The Business Banking Code applies
to businesses. There is a significant overlap between the contents of the two codes however the
Business Banking Code does not state that the banks will refuse unlimited guarantees. The
Business Code also mentions other provisions which may relate to businesses e.g. international
payments, foreign exchange.
Every bank has its own banking code. In general they hold the same idea that they will act fairly
and similarly to every customer they come across. If bank recognize an accused or identified
loan defaulter and still disburse credit facility out of negligence, this means that they are not
following their code of banking and this is against the law. They are disbursing the credit facility
out of negligence means that they are risking their existing customers wealth. This would be a
very unwise, unfair, illegal and unethical act.

Page | 17

General Obligations of the Bank

Generally it is the banks primary obligation to take care of its customers and their wealth and
provide services which are fundamental to the contractual relationship of the banker and the
customer. Further provisions stated in the Banking Code state what services will the bank
provide to its customers as a part of general contractual obligations which are owed to the
customer. For example the bank will help us to choose products or services which meet our
needs and will also give us clear information with regards to services which the bank will
provide to us e.g. joint account customers rights and responsibilities and many more. The Bank
will also provide its customers with regular account statements and all information with respect
to running the customers account e. g how direct debit works, or cheque payments work etc. If
the customer has a passbook the bank will not be required to send bank statements to the
customer. The Banking Code also contains provisions regarding the means of notification of the
change to the terms and conditions; there should also be a notice period of 30 days which must
be given to the customer. If the change in terms and conditions is advantageous to the customer
such change can be carried out immediately without the need for notice to be submitted to the
customer. The notice period stated in the Banking Code is 30 days however under common law
such notice only needs to be reasonable. What is reasonable is determined by the case law.
It is an implied term of the contract that the bank or the banker is not responsible to repay the
customer for the proceeds borrowed from the customer until the customer officially demands
such a payment. Therefore the customer could not have a claim for debt. This term is the
significant term of the contractual relationship between the banker and the customer.

Page | 18

There are further duties owed by the bank to the customer e.g. the bank has a duty to protect its
customer from fraud committed by the agents, directors , partners in making payment orders etc.
There are some statutory protections in relation to the bank in the absence of negligence. There is
also a duty of care owed by the bank to the customer when the bank is giving advice on
investments or when the bank gives advice or explains security documentation. However it was
held that the bank is not under a continuing duty to keep the advice under review. In some
circumstances the bank was also held not to have a duty of care to any third parties.
The duties are defined by case law and they constitute duties of care to the bank. Any wider
duties of care will not be accepted or recognized unless they are implied as contractual terms.
And such term will not be implied if they do not comply with the following requirements, these
are that the term is reasonable and equitable, it is necessary in order for the contract to have
business efficacy, the intention to create this term must be obvious and must be clearly expressed
and it must not clash with any other term.

How Banks Raise Capital? An answer needed to prove the

main custodianship of public money

Are banks really the main custodians of public money? Do really their negligent acts affects
public money supply? Statistical answers below try to prove the fact that banks are the important
custodians of public money and any kind of negligent acts harm greatly in public money supply.
So finding the answers I try to solve it inversely by finding how banks raise their capital to show
the weight of public money.

Page | 19

How do banks raise capital is a question that is best understood by looking at the basics of a
bank. Just as a business sells its products or services as its main line of business and thus its
survival; a bank has the business of lending and recovering from customers at the core of its
raison detre. To make the question of how do banks raise capital easier, let us think of money as
the raw material for a banks business. If a manufacturing firm such as textile business has to
assemble raw materials that start with cotton, a bank has only money that it plans to lend to its
customers as its raw material.
The money that a bank raises to lend is often called the capital. So, how do banks raise capital is
something that has to be understood in this background. Banks have to raise money from sources
in order to have it with them to be lent to customers, from whom they charge a rate of interest
that is higher than that at which they borrow. This accounts for their profit. Since capital is one
of the critical components of a banking business, it is important to understand where all and how
to banks raise capital.
Capital from stakeholders
Banks can do this in a number of ways. The most common, and in fact, a mandatory method of
raising capital is for the organizers (in most cases, these are the stakeholders or founders) of the
bank to put in money from their pockets. Usually, while the amount needed to start a bank varies
from one American state to another, the ratio at which banks get their capital from their
organizers varies between 10 and 15 percent. These organizers are the investors in the bank, and
have a deep interest in the functioning of this lending institution. How do banks raise capital is
understood in a clearer fashion in this context the greater the ability of the organizers to raise
money, the greater the money the bank can lend out , so that it runs healthily and profitably.

Page | 20

Raising capital from shareholders

While organizers make up between 10 and 15 percent of the banks investment, how to banks
raise capital is understood when it is seen that the reminder of the money is raised from
shareholders. The term shareholder implies those who invest in the bank through public
borrowing. The number of shareholders and their individual contributions can vary by a very
wide margin, as can their contribution. As with any other kind of partnership, this kind of
financial relationship too, is such that every stakeholder earns from the profit in proportion to the
investment made.
The markets as lending source for capital
How do banks raise capital is a question that can be answered in another manner. Banks look for
other sources in raising capital. For instance, they can borrow from the financial markets. This
option is usually exercised in free market, capitalist economies, a prime example of which is the
US. In these economies, it is a useful source to have someone borrowing from the markets
because this can be used as a buffer in markets, which by their very nature are volatile and prone
to a lot of flux. When markets are in need of money in case of a crunch, they can always go back
to the banks to which they have lent money. Of course, there are some drawbacks in this system
for both the lender and the borrower. The lender may not be fully sure of getting back money it
has given to banks when it needs it the most, since they normally ask money back from banks
only when it is faced with an emergency, and it is always difficult to get it at such short notice.
For banks, too, there are problems with this kind of option, because they cannot invest this
money on long term plans.
The government as a source of capital
Page | 21

Getting money from the government is another option for banks when it comes to how do banks
raise capital. In governments in which the free market is less powerful a force to reckon with,
government bonds can be a good source by how do banks raise capital. In economies that are
either fully or partly controlled, as in the case of China or India, government lending can be a
very useful source of how do banks raise capital. This is a lesser possibility in free market,
consumerist economies such as the US, but more common in the countries just mentioned. In
these situations, governments lend banks through bonds and other sureties for a number of
reasons. Since it is not always the consumer who dictates demand, governments lend banks as a
kind of safety valve. When the key sectors of the economy, mostly agriculture in these and other
related countries, face problems, the governments can straightaway approach these banks to
which it has lent capital and direct them to divert the money due to the governments back to the
people in need of the money. In most cases, this is usually a case of money transfer. In other
words, the question of how do banks raise capital needs to be looked at from a different
perspective in some countries.
Other ways
How do banks raise capital is to be understood when it one looks at another queer way by which
banks raise capital. In the days of the economic slowdown, some financial companies came to
banks to advise them on how to raise capital. The aim was to get these banks to impart their
experience to these companies on how to liaise with the government and get money from it.
These companies, such as Wells Fargo and Morgan Stanley, had to pay a huge consultancy fee
for these bankers. There were also some financial arrangements by which these banks got a cut
in the amount of money they helped the companies raise! The money that these banks got from
these transactions was put back into the market and other sources, as this too, turned out to be its
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capital in many ways. In this way, how do banks raise capital was a question that was answered
in a very unusual fashion.
So clearly it is observed that a successful bank means a lot of public fund is tied up to it.
Alternatively it can be said that the more custodianship as well as more responsibility as the bank
is running its business in full swing. So if anything bad occurs then not only the bank suffers but
also the people whose money were tied up as the banks were losing their money and getting out
of their business. So only and only for the people a bank cannot act negligently and it results in
huge chain reaction to the public as well.

The factors a bank sees before sanctioning a loan to a borrower

Two major focuses of banking supervision and regulation are the safety and soundness of
financial institutions and compliance with consumer protection laws. To measure the safety and
soundness of a bank, an examiner performs an on-site examination review of the bank's
performance based on its management and financial condition, and its compliance with
regulations.
CAMELS
The examiner uses the CAMELS rating system to help measure the safety and soundness of a
bank. Each letter stands for one of the six components of a banks condition: capital adequacy,
asset quality, management, earnings, liquidity and sensitivity to market risk. When performing
an examination to determine a banks CAMELS rating, instead of reviewing every detail, the
examiner evaluates the overall health of the bank and the ability of the bank to manage risk. A
simple definition of risk is the banks ability to collect from borrowers and meet the claims of its
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depositors. A bank that successfully manages risk has clear and concise written policies. It also
has internal controls, such as separation of duties. For example, a banks management will assign
one person to make loans and another person to collect loan payments.

5-Cs
A safety and soundness examiner also reviews a banks lending activity by rating the quality of a
sample of loans made by the bank. When a bank reviews a loan application, it uses the "5-Cs" to
assess the quality of the applicant. The 5-Cs stand for:
Capacity - measures the borrowers ability to pay, including borrowers payment source and
amount of income relative to debt.
Collateral - what are the banks options if the loan is not paid? What asset can be turned over
to the bank, what is its market value, and can it be sold easily? A valuable asset might be a house
or a car.
Condition - this refers to the borrowers circumstances. For example, if a furniture storeowner
is asking for a loan, the banker would be interested in how many chairs and sofas the store is
expected to sell in the area over the next five years.
Capital - the applicants assets (house, car, savings) minus liabilities (home mortgage, credit
card balance) represent capital. If liabilities outweigh assets, the borrower might have difficulty
repaying a loan if his regular source of income unexpectedly decreases.
Character - measures the borrowers willingness to pay, including the borrowers payment
history, credit report and information from other lenders.

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Global Context
Is money really safe in Banks? An example from Cyprus
After the people of Cyprus had their money commandeered in 2013, this unprecedented event
sent shockwaves throughout the banking system and also the general public. In a weekend, the
Banks had lost the last modicum of trust the public had for them. Even the definition of a bank:
A safe place to store your money is now null and void. As a result of this wealth grab banks
and governments around the world have done their best to try and calm the public into thinking
that this was just a one off incident and that it wont happen here. Here in the UK the
government has spent millions in TV, radio and newspaper advertising campaigns that our
money in the banks is safe and insured up to 85 000.
When this whole Cyprus debacle unfolded I went on record to say that this wealth grab was
just a testing ground before there was widespread implementation of it elsewhere. As usual, I got
a lot of flak from financial commentators and other financial professionals saying that it could
never happen in Britain. Well, I havent been vindicated yet, but the dominos are starting to fall.
In late 2013 the blue print and legislation that was used in Cyprus was secretly installed into
fabric of the banking systems in Canada, the US, Australia, New Zealand and the UK. This
means that when there is another banking crisis, instead of having a Bail Out where the
Governments prop up the banks, there will be a Bail In where a grubby hand will dip into the
personal bank accounts of the public to pay for the mess. The reason for this is that the
Governments no longer have any money, so they are now targeting the only remaining pool of
money of the people.

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The thing is, the moment you deposit your cash into the bank, by LAW, it is not yours. It
becomes the banks property. So they can spend, speculate and do anything they want with it. So
when you withdraw your cash they are effectively loaning it back to you at 0% APR. So in
Cyprus a new term was introduced to the public, Capital Controls. This is where the banks
limited the amount of money the Cypriots could withdraw everyday to just 300 Euros. And right
now, capital controls are slowly finding their way into the UK. Already HSBC customers have
been experiencing Capital Controls when trying to withdraw funds of over 10 000 and in
Nationwide, some people have been severely questioned when trying to withdraw just a few
thousand Pounds. This is only set to get worse.
What hardly anyone has bothered to do is look behind these claims and crunch the numbers. And
the short answer is no. You see, the FSCS is a private company, not a government entity and
there's no pot of money backing up everyone's account. So if someone claims on this, the
compensation is raised by levies (taxes on the public). Being really conservative, if just 10% of
the UK claimed on this...the system would crumble. But realistically, if just 1% of the nation
claimed on this (just 700 000 people), the system wouldn't cope. It's totally ridiculous. So in a
nutshell they are claiming that our money is safe, but if there are any claims, theyll compensate
you by taxing the nation. The Government are so scared of a bank run (people dashing to the
cash machines to withdraw all of their money) that they're promoting this absolutely everywhere
to try and make the public think everything is ok. Far from it...we're the 3rd most indebted nation
on the planet with our debt increasing by 277 000 per minute and the European Banking
community is about to go bust Also the Yanks have a similar system called the FDIC. This is
even sillier as they actually have a pot of money to draw from, $25 Billion but it's backing $9.3
Trillion.
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Bangladesh example and the effects- Sonali Bank and Hallmark Scandal
In May 2012, a report from the Bangladesh Bank revealed that the Ruposhi Bangla Hotel
Branch of the state - owned Sonali Bank, Bangladeshs largest commercial bank, illegally
distributed Tk 36.48 billion (US$460 million) in loans between 2010 and 2012. The largest
share, of Tk 26.86 billion (US$340 million), went to the now infamous Hallmark Group. While
the focus has understandably been on Hallmark, their companies also participated in the fraud,
including:
T and Brothers, Tk 6.10 billlion
Paragon Group, Tk 1.47 billion
Nakshi Knit, Tk 660 million
DN Sports, Tk 330 million
Khanjahan Ali, Tk 50 million
This is considered to be the countrys largest banking scandal. It dwarfs previous fraud cases,
such as a Tk 6.2 billion Letter of Credit fraud in Chittagong in 2007, a Tk 5.96 billion fraudulent
withdrawal from Oriental Bank in 2006, and a Tk 3 billion forgery scandal in 2002.
Now the consequences of these acts are far too imaginable. Not only the Sonali bank itself
becomes the victim in the competitive banking industry of Bangladesh, but also the people who
were the depositors. Undoubtedly the bank is going under serious image crises but what
happened to the public money? The recovery of the money is still not satisfactory and public
were then rushing towards the bank to withdraw their money from the account which resulted in

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serious liquidation crises. So the problem was not remaining among the bank but also spread
among the general public. They suffered and still suffering. So this type of corruption and
negligence of the higher authority is not expected.

Conclusion and Recommendations

A bank is a financial intermediary that accepts deposits and channels those deposits into lending
activities, either directly by loaning or indirectly through capital markets. A bank links customers
that have capital deficits and customers with capital surpluses. Banks bear contractual
relationship with their customers where they are agreed on that they would protect their wealth
right at any cost. It is highly unexpected that Banks would violate these regulations. Being a
public money custodian we expect that banks should not behave in negligence while giving
financial facility to potential defaulter or that has previous default history. Because if anything
goes wrong, ultimately it is the general public who suffer at last.
The bank should receive on behalf of its customer cash directly into the customers account and
accept cheques and other negotiable instruments for clearing into the customers account. The
bank should pay or honor cheques and other withdrawals properly authorized by the customer
during banking hours at the designated business offices of the bank, or any other agreed location
provided there is sufficient funds in the account or agreed overdraft. This also implies the bank
should avoid wrongful dishonor of customers cheques. The bank should give reasonable notice
before closing a customers account. Though generally one month is acceptable, it is held as
inadequate for a business with complex banking relationship in Prosperity V. Lloyds Bank
(1923). However, some circumstances may warrant the immediate closure where a case of fraud
is established. The bank is duty bound to inform the customer if his signature has been forged on
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a cheque or other instrument Greenwood V. Martins Bank (1933). The bank should provide the
customer with statements of account regularly for record and reconciliation purpose. They are
not supposed to charge for this service. The bank should pay agreed interest on deposits and any
other agreed returns on financial investments in the account. The bank must ensure that the
customers money is safe. The bank must also keep the customers account and affairs secret in
line with the qualified conditions in the legal background in Tournier V. National Provincial and
Union Bank of England (1924).

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