What is a bank?

Many firms call themselves banks. Far fewer hold a banking licence. The difference matters to customers, counterparties and investors, because only a licensed bank may lawfully take deposits from the public, and only a licensed bank is subject to the full prudential regime that protects those deposits.

This article sets out the legal test, the main business models, and what a licence actually permits.

The legal test: deposits plus credit

Most legal systems define a bank by its activities rather than its name. The EU definition is a useful reference point because many jurisdictions outside Europe use similar wording. Under Article 4(1)(1) of the Capital Requirements Regulation, a credit institution is an undertaking whose business is “to take deposits or other repayable funds from the public and to grant credits for its own account”.

Two elements must be present together. Taking deposits without lending, or lending your own capital without taking deposits, is a different business with a different regulatory treatment.

The reserved activity is deposit-taking. Article 9 of the Capital Requirements Directive (CRD) requires EU Member States to “prohibit persons or undertakings that are not credit institutions from carrying out the business of taking deposits or other repayable funds from the public”. Narrow exceptions exist for governments, public international bodies and cases expressly covered by national or EU law.

Why deposits are treated differently

A deposit is a promise to repay at par, often on demand, made to members of the public who usually cannot assess the bank’s risks. That promise is what makes bank money usable as money. The Bank of England noted that bank deposits made up 97% of broad money in the United Kingdom at the time of its 2014 analysis.

Because deposits function as money, a bank failure is a public problem as well as a private one. This is the basis for capital and liquidity rules, deposit insurance, central bank liquidity facilities and fit and proper tests for managers and owners. Each of these is covered in its own article in this series.

A wider EU definition for very large investment firms

The current EU definition also captures certain large investment firms. Under point (b) of the same CRR article, a firm that deals on own account or underwrites securities on a firm commitment basis is a credit institution where its consolidated assets reach EUR 30 billion, or where it belongs to a group of that size, subject to stated exclusions. This affects a small number of large trading houses, not ordinary brokers.

What a banking licence permits

A licence is permission to carry on a defined set of activities. In the EU, Annex I of the CRD lists the activities that benefit from mutual recognition across the single market. They include:

Annex I activity	What it covers in practice
1. Taking deposits and other repayable funds	Current, savings and term accounts
2. Lending	Consumer credit, mortgages, factoring, trade finance
3. Financial leasing	Asset finance
4. Payment services	Transfers, card issuing, acquiring
6. Guarantees and commitments	Letters of credit, performance guarantees
7. Trading for own account or for customers	Money market instruments, foreign exchange, derivatives, securities
8. Participation in securities issues	Underwriting and placement
9. Advice to undertakings	Capital structure, mergers and acquisitions
11. Portfolio management and advice	Wealth and asset management

A licence normally covers only the activities named in the authorisation. A bank that wants to add investment services, custody or crypto-asset services may need an extension of its licence or a separate permission.

Conditions attached to the licence

Authorisation comes with minimum conditions. In the EU these include initial capital of at least EUR 5 million, or no less than EUR 1 million for particular categories that a Member State notifies (CRD Article 12). They also include at least two persons who effectively direct the business, and a head office in the Member State of the registered office (CRD Article 13).

Regulators may also grant a licence with restrictions while a new bank finishes building its operations. In the United Kingdom, the Bank of England’s New Bank Start-up Unit describes a mobilisation period that typically lasts no longer than 12 months, during which deposit-taking is restricted to a total of £50,000.

Territory

A licence is granted by one authority for one territory. Within the EU, CRD Article 33 lets a credit institution authorised in one Member State carry on Annex I activities in others, by branch or cross-border services, provided the activities are covered by its home authorisation. This is known as passporting.

Outside such arrangements, a licence stops at the border. Under Article 21c of the CRD as amended by Directive (EU) 2024/1619, Member States must require undertakings from outside the EU to establish an authorised branch before providing core banking services in that Member State, subject to exceptions such as reverse solicitation and services to credit institutions. Member States must apply this rule from 11 January 2027.

Types of bank

The labels below describe business models. Most of them rest on the same deposit-taking licence, with different permissions, customers and risk profiles.

Type	Core business	Typical customers	Licensing notes
Commercial bank	Deposits, working capital loans, trade finance, payments	Companies, public bodies	Full banking licence; often needs payment and FX permissions
Retail bank	Current accounts, savings, mortgages, consumer credit, cards	Individuals and small firms	Full licence; deposit insurance membership; heavy conduct regulation
Private bank	Deposits, lending against assets, portfolio management and advice	Wealthy individuals and families	Banking licence plus investment services permissions
Investment bank	Underwriting, trading, advisory, prime services	Companies, institutions, governments	Often an investment firm; needs a banking licence if it takes deposits
Digital bank	Same as retail or SME bank, delivered without branches	Individuals and SMEs	Same licence as other banks in most jurisdictions; some regulators issued specific licence classes
Offshore or international bank	Deposits and lending mainly for non-residents	International clients, groups, wealth structures	Licensed in an international financial centre, often with limits on domestic business

Digital banks

A digital bank is a bank that operates without physical branches. In most jurisdictions it holds the same licence and meets the same capital, liquidity and governance rules as a branch-based bank.

Some regulators created dedicated licence classes. The Monetary Authority of Singapore awarded two digital full bank licences and two digital wholesale bank licences, the latter serving SMEs and other non-retail segments. MAS states that it is currently not granting new licences of this kind.

Offshore and international banks

International financial centres license banks that mainly serve clients outside the territory. Licences are often split by the type of business permitted. The Cayman Islands Monetary Authority reported 76 licensed banks at 30 June 2026, of which 11 held Category A licences and 65 held Category B licences.

Serious centres expect real presence, not a brass plate. The Central Bank of Bahrain Rulebook requires conventional bank licensees with their registered office in Bahrain to maintain their head office in Bahrain, and requires branches of foreign banks to maintain local management presence and premises appropriate to their business.

What a licence does not give you

A licence is necessary for banking, but it is rarely sufficient for running a bank. Four gaps matter in practice.

1. Market access elsewhere. Outside passporting arrangements, each new market needs its own authorisation, branch or exemption.
2. Correspondent accounts. A licence does not oblige any other bank to open an account for you. Access to US dollar and euro clearing depends on correspondent banks’ own risk assessments.
3. Payment system and card scheme access. Direct participation in a real-time gross settlement system or card scheme has its own rules and onboarding.
4. Every product. Investment services, insurance distribution and crypto-asset services can require separate permissions.

Neighbouring licences that are not banks

Several licence types sit close to banking without permitting deposit-taking. Payment institutions and electronic money institutions move and store client funds but, in the EU, may not take deposits, because that activity is reserved for credit institutions under CRD Article 9. Investment firms hold client assets and trade, but are not credit institutions unless they fall within the large investment firm test above.

Non-bank lenders lend their own or borrowed wholesale funds. Depending on the jurisdiction they may need a consumer credit or lending licence, but not a banking licence, as long as they do not take repayable funds from the public.

Questions to settle before choosing a licence

1. Will the business take repayable funds from the public, or can it operate on a payment or e-money model?
2. Which activities from the regulator’s list are needed on day one, and which can wait?
3. Which customers and countries will be served, and does that require a passport, branches or separate licences?
4. Who will provide correspondent accounts and payment system access, and on what terms?
5. Can the group meet the minimum capital, local management and governance conditions for the full period until break-even?

The answers usually narrow the realistic options to two or three jurisdictions. The later articles in this series explain the prudential, governance, compliance and infrastructure requirements that apply once the choice is made.