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A banking license is an authorization from a regulating body that enables a person or group to open a financial institution in a particular jurisdiction. The banking industry in most countries is highly regulated. Banking is a core component of a country’s economy, and the license requirements are typically strict to stave off bank failures and the collapse of public confidence. Only those individuals that have been thoroughly investigated are allowed to provide banking services to the public.
The definition of a bank differs depending upon the country at issue and the legal system that is in place. Generally, a bank is a financial institution that accepts deposits from the public and then lends the money under its control to other individuals and entities at an agreed upon rate of interest. The bank keeps a record of the customer’s deposits on account and is required to provide the customer with access to his funds upon demand. Since there is a high degree of trust involved in the process, a banking license is only granted in instances where the regulators are convinced there is no risk that the people running the bank will default on its obligations to the public.
Banks are primarily regulated by the jurisdiction that grants the banking license, usually within the broader context of national laws governing financial institutions. In the U.S., for example, a bank can be licensed by state or federal authorities. A license granted by a state restricts the bank’s operations to within the state’s borders. As the primary regulator of the bank, the state would be responsible for ensuring that the bank has enough operating cash and reserve funds, the principals are trustworthy, bank procedure complies with state and federal laws, and that the public’s money is completely safe when deposited.
A person seeking a state banking license in the U.S. would typically have to prove he has raised enough money to satisfy operating needs and capital reserve requirements, submit a plausible business plan, and undergo a personal and professional investigation of all the principals, including investors, officers, and directors. The type of vetting involved in obtaining a banking license is typically much more involved than with any other type of business license. Maintaining the citizenry’s trust in banks is of paramount importance to every jurisdiction. If a bank defaults on its obligations or if its principals run afoul of the law, the public can lose faith in their ability to withdraw funds when needed. The public panic caused by failing banks can crash a country’s entire economy and cause political upheaval.
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