ByStephen D. Simpson, CFA
Banking systems have been with us for as long as people have been using money. Banks and other financial institutions provide security for individuals, businesses and governments, alike. Let's recap what has been learned with this tutorial:
In general, what banks do is pretty easy to figure out. For the average person banks accept deposits, make loans, provide a safe place for money and valuables, and act as payment agents between merchants and banks.
Banks are quite important to the economy and are involved in such economic activities as issuing money, settling payments, credit intermediation, maturity transformation and money creation in the form of fractional reserve banking.
To make money, banks use deposits and whole sale deposits, share equity and fees and interest from debt, loans and consumer lending, such as credit cards and bank fees.
In addition to fees and loans, banks are also involved in various other types of lending and operations including, buy/hold securities, non-interest income, insurance and leasing and payment treasury services.
History has proven banks to be vulnerable to many risks, however, including credit, liquidity, market, operating, interesting rate and legal risks. Many global crises have been the result of such vulnerabilities and this has led to the strict regulation of state and national banks.
However, other financial institutions exist that are not restricted by such regulations. Such institutions include: savings and loans, credit unions, investment and merchant banks, shadow banks, Islamic banks and industrial banks.
Financial AdvisorContrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
Personal FinanceRetail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
InvestingA bank is a financial institution licensed to receive deposits or issue new securities to the public.
Personal FinanceFractional reserve banking is the banking system most countries use today.