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Regulation
Currently in
most jurisdictions commercial banks are regulated by government entities and
require a special bank license to operate.
Usually the definition of the business of banking for the purposes of
regulation is extended to include acceptance of deposits, even if they are
not repayable to the customer's order—although money lending, by itself, is
generally not included in the definition.
Unlike most other regulated industries, the regulator is typically also a
participant in the market, being either a publicly or privately governed
central bank. Central banks also typically have a monopoly on the business
of issuing banknotes. However, in some countries this is not the case. In
the UK, for example, the Financial Services Authority licenses banks, and
some commercial banks (such as the Bank of Scotland) issue their own
banknotes in addition to those issued by the Bank of England, the UK
government's central bank.
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:
1. The bank account balance is the financial position between the bank and
the customer: when the account is in credit, the bank owes the balance to
the customer; when the account is overdrawn, the customer owes the balance
to the bank.
2. The bank agrees to pay the customer's cheques up to the amount standing
to the credit of the customer's account, plus any agreed overdraft limit.
3. The bank may not pay from the customer's account without a mandate from
the customer, e.g. a cheque drawn by the customer.€
4. 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.
5. The bank has a right to combine the customer's accounts, since each
account is just an aspect of the same credit relationship.
6. The bank has a lien on cheques deposited to the customer's account, to
the extent that the customer is indebted to the bank.
7. 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.
8.The bank must not close a customer's account without reasonable notice,
since cheques are outstanding in the ordinary course of business for several
days.
These implied contractual terms may be modified by express agreement between
the customer and the bank. The statutes and regulations in force within a
particular jurisdiction may also modify the above terms and/or create new
rights, obligations or limitations relevant to the bank-customer
relationship. Some types of financial institution, such as building
societies and credit unions, may be partly or wholly exempt from bank
license requirements, and therefore regulated under separate rules.
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