Economics
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.
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9 Key excerpts on "Banks"
eBook - PDF- S. Janssen(Author)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
8 2 What Is a Bank? 2.1 Introduction Without discussing the theoretical question of what constitutes a financial intermediary at great length, this book accepts that there are financial inter- mediaries, such as Banks, insurance companies and investment companies which are instrumental to the functioning of the financial markets as their activities provide the institutional framework. Clearly, there would not be any significant financial market without these financial institutions, nei- ther would there be any financial institution without the existence of such markets. The structure of a financial system is to a great extent contingent upon the institutions that make up the system. Unlike insurance and investment companies, Banks play the most important role in maintaining the stability of a financial system. Therefore, this work focuses on Banks, which makes it necessary to consider the definition of a “bank”. This can be approached in a threefold manner (Büschgen, 1993, pp. 9–26). Büschgen differentiates between a legal, a microeconomic and a macroeconomic definition of a bank – an approach that also appears functional for this book. Consequently, this chapter first provides an overview of the bank-specific directives adopted at EU level, and then outlines the legal definitions of a bank in the United Kingdom and Germany. The second half of this chapter considers the microeconomic definition of a bank, and concludes with the inextricably linked macroeconomic concept of a bank. 2.2 The rationale for banking regulation Prior to the discussion of a bank’s legal status in the EU, the United Kingdom and Germany, it is necessary to explain why the banking sector is so heavily regulated. The Banks’ pivotal role within the financial system essentially stems from their transformation function, which implies the matching of monetary surplus and deficit units (Mishkin, 1986; Howells & Bain, 2002).
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
Those who want to borrow money can go directly to a bank rather than trying to find someone to lend them cash. Transaction costs are the costs associated with finding a lender or a borrower for this money. Thus, Banks lower transactions costs and act as financial intermediaries—they bring savers and borrowers together. Along with making transactions much safer and easier, Banks also play a key role in creating money. Banks as Financial Intermediaries An “intermediary” is one who stands between two other parties. Banks are a financial intermediary—that is, an institution that operates between a saver who deposits money in a bank and a borrower who receives a loan from that bank. Financial intermediaries include other institutions in the financial market such as insurance companies and pension funds, but we will not include them in this discussion because they are not depository institutions, which are institutions that accept money deposits and then use these to make loans. All the deposited funds mingle in one big pool, which the financial institution then lends. Figure 27.4 illustrates the position of Banks as financial intermediaries, with deposits flowing into a bank and loans flowing out. Of course, when Banks make loans to firms, the Banks will try to funnel financial capital to healthy businesses that have good prospects for repaying the loans, not to firms that are suffering losses and may be unable to repay. 654 27 • Money and Banking Access for free at openstax.org FIGURE 27.4 Banks as Financial Intermediaries Banks act as financial intermediaries because they stand between savers and borrowers. Savers place deposits with Banks, and then receive interest payments and withdraw money. Borrowers receive loans from Banks and repay the loans with interest. In turn, Banks return money to savers in the form of withdrawals, which also include interest payments from Banks to savers.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
Those who want to borrow money can go directly to a bank rather than trying to find someone to lend them cash. Transaction costs are the costs associated with finding a lender or a borrower for this money. Thus, Banks lower transactions costs and act as financial intermediaries—they bring savers and borrowers together. Along with making transactions much safer and easier, Banks also play a key role in creating money. Banks as Financial Intermediaries An “intermediary” is one who stands between two other parties. Banks are a financial intermediary—that is, an institution that operates between a saver who deposits money in a bank and a borrower who receives a loan from that bank. Financial intermediaries include other institutions in the financial market such as insurance companies and pension funds, but we will not include them in this discussion because they are not depository institutions, which are institutions that accept money deposits and then use these to make loans. All the deposited funds mingle in one big pool, which the financial institution then lends. Figure 14.4 illustrates the position of Banks as financial intermediaries, with deposits flowing into a bank and loans flowing out. Of course, when Banks make loans to firms, the Banks will try to funnel financial capital to healthy businesses that have good prospects for repaying the loans, not to firms that are suffering losses and may be unable to repay. 344 14 • Money and Banking Access for free at openstax.org FIGURE 14.4 Banks as Financial Intermediaries Banks act as financial intermediaries because they stand between savers and borrowers. Savers place deposits with Banks, and then receive interest payments and withdraw money. Borrowers receive loans from Banks and repay the loans with interest. In turn, Banks return money to savers in the form of withdrawals, which also include interest payments from Banks to savers.
eBook - PDFBasic Finance
An Introduction to Financial Institutions, Investments, and Management
- Herbert Mayo, , , (Authors)
- 2018(Publication Date)
- Cengage Learning EMEA(Publisher)
Detailed data are available at the Federal Reserve’s website www.federalreserve.gov . As may be seen in the preceding data, savings accounts constitute about 74 percent of the money supply when the broader definition (M-2) is used. This broader defi-nition of the money supply is preferred by those economists and financial analysts who stress the ease with which individuals may transfer funds among the compo-nents of M-2. Individuals may transfer funds from a savings account or time deposit into a checking account. Such a movement increases M-1 because demand deposits have risen, but the transaction has no impact on M-2 because the increase in demand deposits is offset by the decline in the other account. In summary, money is crucial to an advanced economy, for it facilitates the trans-fer of goods and resources. An advanced economy could not exist without something to perform the role of money. Since a large proportion of the money supply consists of deposits in various depository institutions, the student of finance should under-stand financial markets, the banking system, and their regulation. Money supply Total amount of money in circulation M-1 Sum of coins, currency, and demand deposits M-2 Sum of coins, currency, demand deposits, sav-ings accounts, and small certificates of deposit Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 2 The Role of Financial Markets and Financial Intermediaries 15 2.2 The Role of Interest Rates The words money and interest are often used together, but their meanings differ and they perform different roles.
eBook - PDF- Hans Keiding(Author)
- 2017(Publication Date)
- Red Globe Press(Publisher)
Commercial Banks. These are the Banks that receive deposits from savers and o ff er loans to business, and indeed the type of Banks that most if not all of the subsequent chapters are dealing with. The reason that they figure as commercial Banks is that they were formerly to be distinguished from investment Banks (see below), at least in the United States, where the two types of Banks were not allowed to be connected through ownership. 22 Chapter 2: The business lines of a bank 23 Thrifts and credit unions. These are di ff erent versions of savings Banks and other financial institutions, mainly directed towards investment in mortgage loans. Historically they were subject to strict regulation as guarding the savings of the less wealthy, but regulations have gradually been weakened so as to completely abolish the distinction between savings Banks and other commercial Banks. Savings Banks are cooperatively owned, as are credit unions, which originated as coali-tions of borrowers selling bonds against mortgages. Also, mortgage loans have largely been transferred to the ordinary Banks in the course of the last two decades. Table 2.1 Services Performed by Financial Intermediaries Brokerage Qualitative Asset Transformation Transactions Monitoring (buying / selling securities, (following a borrower’s safekeeping, etc.) compliance with loan covenants) Financial advice Management expertise (portfolio management etc.) (venture capitalist Certification running a firm) (bond ratings) Guaranteeing Origination (insurance company (initiating loan to borrower) providing insurance) Issuance Liquidity creation / claims transformation (taking security o ff er (bank making illiquid loans to the market) and transforming them to Funding liquid deposits) (making a loan) Venture capitalists are investment companies o ff ering capital to firms under development and taking an active role in the management of the borrowing firm.
- Michael Brandl(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Banks provide liquidity, lend in large amounts, reduce transaction costs, and pay returns to investors. Let’s con-sider why each of these things is critically important to the functioning of a market economy. 7-4a Provide Liquidity Think about the differences between bank depositors and borrowers in terms of length of time. In general, depositors want to have access to their funds at any time. To understand why, think about checking accounts, or what we will call “demand deposits.” Let’s suppose someone gets paid the first of every month by having their paycheck deposited directly into their demand deposit account. During the month, this depositor withdraws funds to pay bills, buy food, and so on. Thus this demand deposit account holder wants to be able to convert their demand deposit into other assets in a quick, easy, and inexpensive way. We say that this account holder wants liquidity. Liquidity is defined as the ease and expense at which one asset can be converted into another asset. Demand deposits are very liquid; that is, converting a demand deposit into cash is easy and inexpensive. On the other hand, an automobile is illiquid; that is, it takes a long time and a lot of hassle to sell a car or to convert the car into another asset: cash. Liquidity: The ease and expense at which one asset can be converted into another asset. So, in general, bank depositors such as demand deposit account holders want liquid-ity; they want to be able to convert their bank accounts into cash quickly, easily, and inexpensively. Borrowers, on the other hand, want to borrow for a long time. Think about someone who borrows money to purchase a new car. This borrower is interested in paying back the amount borrowed over the next 4 to 6 years. People who borrow money to buy a house are looking to pay back the money over the next 30 years. This desire to borrow for a relatively long time also extends to businesses who want to borrow money to buy office equipment, machinery, and so on.
eBook - PDFDomestic and Multinational Banking
The Effects of Monetary Policy
- Rae Weston(Author)
- 2019(Publication Date)
- Columbia University Press(Publisher)
Banks provide their demand deposit and other services to consumers 32 The Nature of Banking (whether these are businesses or individuals) from a number of branches and agencies located at places spatially convenient to these consumers. Through these branches and agencies Banks provide loan facilities to customers. It is comparatively risky and expensive for deficit and sur-plus spending units to transact directly with each other rather than through the intermediation of a bank. That is, Banks by specialisation in the provision of loans are able to obtain economies in the gathering, checking and continuous monitoring of information about classes of borrowers, they can gain access to credit information collected by others and they are able to reduce significantly the costs of search which would be incurred by borrowers and lenders if they had to seek each other out directly. The types and amounts of loans, again a breaking bulk transaction, that a particular bank will offer depends both on the areas in which it has expertise and the clientele which it services. Clients will wish to have banking services available at their spatial convenience and Banks will find it worthwhile to establish local branches to specialise in the provision of services, particularly since convenience of location rather than lowest price is the more consistent attraction for clients in an imperfectly informed position. Loans will be individually tailored to the borrower's circumstances which will include the bank's own ex-perience in lending to borrowers of similar characteristics as well as information available about the individual and the collateral he may be able to provide. In their specialisation over space Banks may also specialise in particular clientele, that is, businesses or households.
- G.C. Harcourt(Author)
- 2019(Publication Date)
- Routledge(Publisher)
7 The Role, Functions and Definition of Money* C. A. E. Goodhart BANK OF ENGLAND I DEFINITION Money can be and has been defined in many ways. For statistical purposes the stock of money is often defined in terms of certain clearly distinguishable, but analytically arbitrary, 1 institutional dividing lines. Since the dividing line between monetary and non-monetary assets is, perhaps, arbitrary, (e.g., whether or not term deposits at Banks, or savings Banks, or other financial intermediaries should be included), the choice of assets to be included in the definition of money may be taken on pragmatic and empirical grounds. For example, money might be defined as that set of liquid financial assets which has both a close correlation with the development of the economy, and which is potentially subject to the control of the authorities. Attention then becomes focused on the fluctuations of that set of assets giving the clearest indications of the development of the economy and of the authorities' efforts to influence that development. Such a pragmatic approach, selecting the definition on the basis of ex post statistical correlations, leaves one no wiser about the role of money. 2 Why should the statistical construct, the stock of money, vary in certain predictable ways with the level of economic activity? Why is it held at all? To answer such questions it is necessary to begin by enquiring what particular functions money fulfils. A standard economic approach to defining a particular commodity, or industry, is to examine the cross-elasticities between it and other potential substitutes, in this case between monetary and other assets. Only if such *Most of this essay is a redraft of Chapter I of my Money, Information and Un-certainty (London: Macmillan, 197 5). I am most grateful for comments and suggestions from A.
eBook - PDFFundamentals of Financial Instruments
An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives
- Sunil K. Parameswaran(Author)
- 2022(Publication Date)
- Wiley(Publisher)
CHAPTER 1 An Introduction to Financial Institutions, Instruments, and Markets THE ROLE OF AN ECONOMIC SYSTEM Economic systems are designed to collect savings in an economy and allocate the available resources efficiently to those who either seek funds for current consumption in excess of what their resources would permit, or else for investments in productive assets. The key role of an economic system is to ensure efficient allocation . Efficient and free flow of resources from one economic entity to another is a sine qua non for a modern economy. This is because the larger the flow of resources and the more effi-cient their allocation, the greater is the chance that the requirements of all economic agents can be satisfied, and consequently the greater are the odds that the economy’s output will be maximized. The functioning of an economic system entails making decisions about both the production of goods and services and their subsequent distribution. The success of an economy is gauged by the extent of wealth creation. A successful economy con-sequently is one that makes and implements judicious economic decisions from the standpoints of production and distribution. In an efficient economy, resources will be allocated to those economic agents who are able to derive the optimum value of output by employing the resources allocated to them. Why are we giving so much importance to the efficiency of an economic system? The emphasis on efficiency is because every economy is characterized by a relative scarcity of resources as compared to the demand for them. In principle, the demand for resources by economic agents can be virtually unlimited, but in practice, economies are characterized by a finite stock of resources. Efficient allocation requires an extraordinary amount of information as to what people need, how best goods and services can be produced to cater to these needs, and how best the produced output can be distributed.
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