Banff was first settled in the 1880s, after the transcontinental railway was built through the Bow Valley. In 1883, three Canadian Pacific Railway workers stumbled upon a series of natural hot springs on the side of Sulphur Mountain. In 1885, Canada established a federal reserve of 26 km² around the hot springs, and began promoting the area as an international resort and spa as a way to support the new railway. In 1887, the reserve area was increased to 673 km² and named "Rocky Mountain Park." This was the beginning of Canada's National Park system.
The area was named Banff in 1884 by Lord Steven, a former Canadian Pacific Railway director, recalling the name of his birthplace, Banffshire in Scotland. Canadian Pacific built a series of grand hotels along the rail line and advertised the Banff Springs Hotel as an international tourist resort.
Banff townsite developed near the railway station as a service centre for tourists visiting the park. It was administered by the Government of Canada's national parks system until 1990, when the Town of Banff became the first and only incorporated municipality within a Canadian national park. In 1985, the United Nations declared Banff National Park, as one of the Canadian Rocky Mountain Parks, a World Heritage Site. Banff remains one of the most popular tourist destinations in Canada.
According to the 2007 municipal census, the Town of Banff's permanent population was 8721. However, this figure includes a seasonal shadow population of more than 1000. The town's growth in recent years has led to concerns by environmentalists who fear the town's growth will harm the wilderness of the surrounding national park. The federal government has attempted to address these concerns by restricting development in the town, and mandating that only people who can demonstrate a "need to reside" may take up permanent residence in the community.