Banks
Banks are financial institutions that accept deposits from individuals and businesses and provide loans and other financial services. They play a crucial role in the economy by facilitating the flow of money and credit. Banks also serve as intermediaries between savers and borrowers, helping to allocate capital efficiently within the economy.
7 Key excerpts on "Banks"
eBook - ePub- Jin Cao(Author)
- 2021(Publication Date)
- Routledge(Publisher)
...PART I Introduction CHAPTER 1 Introduction DOI: 10.4324/9780429356773-2 1.1 What Are Banks and Why Are They Special? B anks are among some of the most important yet sometimes the most controversial institutions in an economy. Banks provide socially desirable services for households, firms, and other financial institutions, but bank failure often costs enormously for taxpayers and economic growth. In this chapter, we will take a brief look inside the banking industry, explain terms and jargon that we will use frequently in the rest of this book, and focus on the features in banking that make Banks and the economics of banking special. According to Encyclopædia Britannica, a bank is “an institution that deals in money and its substitutes and provides other money-related services. In its role as a financial intermediary, a bank accepts deposits and makes loans”. That is, a bank provides financial intermediation services between lenders and borrowers, collecting funds from lenders and lending the funds to borrowers; of course, nowadays, we shall also interpret “deposits”, “loans”, “depositors”, and “borrowers” more broadly. In addition, the boundary between Banks and other types of financial institutions is becoming more and more blurred, for example, certain financial institutions such as mutual funds also provide financial intermediation services. In the narrow sense, only a financial institution that carries a banking license that is issued by banking authority is legally classified as a bank...
eBook - ePub- John Roscoe Turner(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...Banks are institutions which deal in credit; they make their income by selling their credit to customers. This credit is more convenient than primary money, and is so universally acceptable as to become the common medium of exchange in the business world. A bank sells its credit by simply giving its promise to pay. The written evidence of an individual's promise to pay is a promissory note; the written evidence of a bank's promise to pay takes the form of a bank-note or an entry in what is known as a "pass-book." But why such confidence in a bank that its mere promise comes to serve as the common medium of exchange throughout the business world? This confidence rests upon so many pillars of support that a mere, enumeration of them becomes tedious. They are: the bank's paid-up capital; its surplus and undivided profits; its reputation and good-will; the character of its loans and securities held; the liability of stockholders; the prestige of its officers, directors, and stockholders; and, finally, the people's confidence is strongly supported by faith in the control and inspection by expert official examiners. Banks perform various functions useful to their customers; some of these are performed by institutions other than Banks. They maintain deposit vaults, change money, sell securities, and serve as trustees. But the one essential and true banking function is that of dealing in credit. 9. Banks as Reservoirs of Capital. A bank may be likened to a reservoir from which capital (purchasing power) flows in the form of credit. Surplus funds flow into the bank and become the basis of credit issues, which flow out to the places where capital is needed. Thus Banks become equalizing agencies of finance throughout the community. Small driblets of idle capital are collected by the Banks and consolidated into huge funds capable of meeting the demands for large capital on the part of great industrial establishments...
eBook - ePubThe Bank Credit Analysis Handbook
A Guide for Analysts, Bankers and Investors
- Jonathan Golin, Philippe Delhaise(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
...In contrast, nonfinancial firms, with a few exceptions, are lightly regulated in most jurisdictions, and governments generally take a hands-off policy toward their activities. In most contemporary market-driven economies, if an ordinary company fails, it is of no great concern. This is not so in the case of Banks. Because they depend on depositor confidence for their survival, and since governments neither want to confront irate depositors, nor more critically, contend with a significant number of Banks unable to function as payment and credit conduits, deposit-taking institutions are rarely left to fend for themselves and go bust without a passing thought. Even where deposit insurance exists and depositors remain pacified, the failure of a single critical financial institution may be plausibly viewed by policymakers as likely to have a detrimental impact on the health of the regional or national financial system. Moreover, the costs of repairing a banking crisis typically far outweigh the costs of taking prudent measures to prevent one. Governments therefore actively monitor, regulate, and—in light of the importance of Banks to their respective economies—ultimately function as lenders of last resort through the national central bank, or an equivalent agency. Owing to the privileged position that Banks commonly enjoy, their credit analysis must give due consideration to an institution’s role within the relevant financial system. Its position will affect the analyst’s assessment concerning the probability, and degree, of support that may be offered by the state—whether explicitly or more commonly implicitly—in the case the bank experiences financial distress. Making such assessments not only calls for consideration of applicable laws and regulations, but also relevant institutional structures and policies, both historic and prospective...
eBook - ePubMoney and Banking
An International Text
- Robert Eyler(Author)
- 2009(Publication Date)
- Routledge(Publisher)
...7 The microeconomics of banking Introduction Like any other business, financial intermediaries have sales, administration, building costs, electricity bills, accounts payable, and office supplies expenses. What makes these businesses different from most others is that the product sold is money. This is true for commercial Banks, insurance companies, and investment Banks alike. These firms sell services also, but these services are tied to the storing and investing of money in order to make revenue. Financial intermediaries take profits from financial leverage, or in the form of commission as a percent of investor revenue made on a transaction, or both. It is important to view the financial intermediary, especially Banks, like any other firm. This chapter’s focus is on the microeconomics of banking decisions, which entails some review of basic price theory from microeconomics. Maximizing profit is assumed to be behind all decisions made by the bank to either approve or reject loan applications, choosing to hire a customer service representative, buying government debt securities, or taking in new deposits. Regulations concerning banking and financial markets are discussed briefly, especially international differences between regulatory environments. We assume here that the profit maximization decisions made by Banks are done with the appropriate regulatory environment in mind and acting as constraints on activities. Demand and supply functions are discussed as in any other business. The interaction of the marginal utility and marginal cost for the consumer takes place alongside the interaction of marginal revenue and marginal cost for the financial intermediary. The pursuit of net interest margin lies at the heart of the bank’s profit function. This chapter begins with an overview of demand and supply for deposits to fund the loanable funds market described in Chapter 2. The profit functions and optimality for a bank are also shown...
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...The other half was in “circulation.” However, many of these coins were apparently being hoarded, as few of them were observed in day-to-day transactions. According to the adage, money makes the world go around. As far back as 300 B.C.E., Aristotle maintained that everything must be assessed in money because this allows people to exchange their services and so makes society possible. Indeed, money is an integral part of our everyday life. In this chapter, we will examine money and the role that it plays in the economy. We will focus on the nature of money, the operation of our banking system, and the process by which money is created. Throughout this chapter, we will refer to the Federal Reserve System, which is the central banking system of the United States. The Federal Reserve supplies Banks 1 with currency, operates a nationwide clearing mechanism for checks, serves as a lender of last resort for troubled Banks, supervises and examines member Banks for safety and soundness, provides checking accounts for the U.S. Treasury, issues and redeems government securities, and conducts monetary policy for the nation. We will discuss the nature and operations of the Federal Reserve System more fully in the next chapter. 1 The U.S. economy has an array of Banks, including commercial Banks, savings and loan associations, mutual savings Banks, and credit unions. We call these depository institutions : They accept deposits from people and provide checking accounts that are part of the money supply. The Meaning of Money When you go to Pizza Hut to purchase a dinner, you obtain something of value—a pizza and a soft drink. To pay for these items, you might hand the waiter some cash or a personal check. The restaurant is happy to accept either of these pieces of paper, which, in themselves are worthless...
eBook - ePubFinancial Stability and Prudential Regulation
A Comparative Approach to the UK, US, Canada, Australia and Germany
- Alison Lui(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...Particular attention will be paid to the UK, Germany, EU and US since Australia and Canada fared better in the global financial crisis (the relatively new regulatory framework of the European Systemic Risk Board deserves closer examination); and the final section offers a conclusion. It will be seen that central Banks such as the Bank of England, the ECB and the Federal Reserve have become powerful since the global financial crisis primarily because they were ill-equipped entering the crisis. The lender-of-last-resort role and micro-prudential supervision are crucial in a crisis, and it is justifiable for central Banks to have more interest in financial supervision since they usually increase and widen their range of acceptable collateral in a crisis. Whether the twin functions of financial stability and prudential regulation should co-exist under the same roof depends to a certain degree on each country’s culture, politics and legal system. However, clear communication and co-operation are necessary to ensure that central Banks and regulatory agencies sustain the synergy effectively. Financial stability and central Banks Central Banks are government organisations shaped by public law (Meade 2012). In Fischer’s lecture of 1994, he sets out the principles of the new central-bank doctrine whereby central Banks must have a clear mandate to maintain price stability, exercise independence in using monetary tools such as setting interest rates and be accountable for their actions (Liikanen 2013). Modern central Banks are primarily occupied with monetary-policy matters (Bank for International Settlements 2009) since confidence in price stability and the currency is crucial for a healthy economy. With time, the combination of economic crises, wars and the breakdown of the gold standard transformed central Banks from government Banks into public agencies...
eBook - ePubUnderstanding Central Banking
The New Era of Activism
- David Jones(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...1 History and Purpose of Central Banking Reduced to its essence, central banking is critical in maintaining an orderly modern economy, but it has proved to be more art than science. No matter how sophisticated the analysis of the impact of monetary policy on the financial markets and how they, in turn, influence spending, output, employment, and inflation, central banking comes down to a process of trial and error, observation and adjustment. To be sure, only central Banks have the special power to increase aggregate liquidity in their respective financial systems. Moreover, reasonably independent central Banks like our Federal Reserve (the Fed) can react more promptly to financial crises than slow-moving legislatures or other government agencies on the fiscal side. Nevertheless, when fighting financial crises, it has been the Bernanke Fed’s artful innovation, timing, and the unexpectedly large scale of its actions that have saved the day, steering us away from a second Great Depression while rebuilding shattered market confidence. In short, it was Fed chairman Ben Bernanke’s willingness “to do whatever it takes” that kept the U.S. economy afloat, as emphasized by David Wessel in his excellent book, In FED We Trust: Ben Bernanke’s War on The Great Panic (2009). L ENDER OF L AST R ESORT Traditionally, central Banks have been viewed as lenders of last resort. The central bank is the institution that your commercial bank turns to in a financial crisis when it is under assault by depositors and short-term bank debt holders demanding immediate cash in return for these bank liabilities. The Bank of England—founded in 1694 as the nation’s official bank, early debt manager, and clearinghouse—has successfully refined its role as a lender of last resort over the years and thus could be considered the bloodline ancestor of modern central banking. The Bank of England was nationalized in 1946, and subsequently became an independent public organization in 1997...
