What is the economic function of a bank? – Education

commercial banks play a significant function in the fiscal arrangement and the economy. As an identified component of the fiscal system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialized fiscal services, which reduce the monetary value of obtaining information about both savings and borrowing opportunities. These fiscal services help one to make the overall economy more efficient. Imagine a World Without Banks One way to answer your question is to imagine, for a consequence, a populace without bank institutions, and then to ask yourself a few questions. This is not a good academic exercise; many former eastern-block nations began facing this question when they began to create fiscal markets and develop market-oriented banks and other financial institutions. If there were no banks…

  • Where would you go to borrow money?
  • What would you do with your savings?
  • Would you be able to borrow (save) as much as you need, when you need it, in a form that would be convenient for you?
  • What risks might you face as a saver (borrower)?

How Banks Work Banks operate by borrowing funds-usually by accepting deposits or by borrowing in the money markets. Banks borrow from individuals, businesses, fiscal institutions, and governments with excess funds ( savings ). They then use those deposits and borrowed funds ( liabilities of the depository financial institution ) to make loans or to purchase securities ( assets of the bank ). Banks make these loans to businesses, other fiscal institutions, individuals, and governments ( that need the funds for investments or early purposes ). Interest rates provide the price signals for borrowers, lenders, and banks. Through the process of taking deposits, making loans, and responding to sake pace signals, the banking system helps channel funds from savers to borrowers in an effective manner. Savers range from an individual with a $ 1,000 certificate of deposit to a corporation with millions of dollars in temp savings. Banks service an across-the-board array of borrowers, from an individual who takes a loan of $ 100 on a credit card to a major corporation financing a billion-dollar corporate fusion. The table below provides a June 2001 snapshot of the counterweight sheet for the entire U.S. commercial bank industry. It shows that the bulge in banks ‘ sources of funds comes from deposits – checks, savings, money commercialize deposit accounts, and time certificates. The most common uses of these funds are to make real estate and commercial and industrial loans. person banks ‘ asset and liability composition may vary widely from the diligence figures because some institutions provide specialized or limited banking services. Banks Are Only One Type of Financial Intermediary

finally, the U.S. financial services industry and financial markets are highly developed. In late decades, many new products and services have been created, vitamins as well as new financial instruments and institutions. today, in addition to banks, there are several other important types of fiscal intermediaries. These include savings institutions, credit unions, insurance companies, common funds, pension funds, finance companies, and real estate of the realm investment trusts ( REITs ). Banks ‘ assets have grown in late decades in absolute terms; however, banks have tended to lose market share to even faster-growing intermediaries such as pension funds and common funds. still, banks continue to account for a significant share-over 23 percent of the assets of all fiscal intermediaries at the end of the year 2000, as the chart below shows.

Chart: Financial Intermediary Asset Market Share Yearend 2000 (%)

Let me besides suggest some more boost reading materials: What’s Different about Banks–Still? Milton Marquis.
Federal Reserve Bank of San Francisco. FRBSF Economic Letter. No. 2001-09. Apr. 6, 2001. ( 8-22-01 )
/publications/economics/letter/2001/el2001-09.html Are Banks Special? A Revisitation. E. Gerald Corrigan.
Federal Reserve Bank of Minneapolis. The Region. No. v. 14, no 1. Mar 2000, p. 14-17. ( 8-22-01 )
hypertext transfer protocol : //www.minneapolisfed.org/pubs/region/00-03/corrigan.cfm

personal Financial Education, FederalReserveEducation.org, 2003

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