Banking system easily explained

banking safe deposit

Today the banking industry is the backbone of the economy and has a major contribution to its growth.

The banking industry is also the main driver for currency and financial stability.

It is quite complex but originally the idea was to make life simpler

 How did banking started?

Originally the idea was to make life simpler.

11th century italy was the center of European trading.Merchants from all over the continent met to trade their goods.But there was one problem.Too many currencies in circulation.

In Pisa, merchants had to deal with seven different types of coins and had to exchange their money constantly.This exchange business, which commonly took place outdoor on benches is where we get the word bank from.From the word banco, italian for bench.

During the 17th century in London it was the goldsmiths who developed banking in its modern form.

The goldsmiths used to store the gold of wealthy clients in their vaults. They started lending this gold in exchange of a promissory note and the payment of an interest charge.

That was the beginning of modern banking.

General role of a bank.

Depositors with money surplus place their money at the bank in  order to earn a return through the credit interest. Borrowers on the other hand are paying interest on the money in order to accomplish an objective they are seeking.

How do banks makes profit?

Banks primary source of revenue comes from the difference between the interest it is paying to depositors and the earnings from borrowers.

A bank also makes profit from charging fees and commisions for services to its customers and investments.

How are banks regulated?

Banks collect funds from depositors in the form of small sized deposits. Then it repackage them into larger size loans.

Borrowers on the other hand might not be able to repay the money they borrowed from the bank.

In addition to that, banks also invest in risky assets. The major role of central banks is protecting depositors money by monitoring the adequate level of riskiness banks are taking.

What is a central bank?

Central banks oversee monetary policy to implement specific goals such as currency stability,low inflation .They determine the interest rates that influence the banks pricing schemes. They are the economy’s money supply. They issue currency and grant authorization to establish banks.

Central banks also impose a threshold for capital requirements and place reserve requirements to ensure liquidity in crisis mode. They shape lending policies through margin requirements and other tools. They act as a lender of last resort to finance banks that need liquidity.

Types of banks

Today there are several type of banks for the different types needs of consumers. They also give consumers advices on how they can manage their money.

A retail bank provides services to individuals.

Commercials and corporate banks serve small to mid size businesses and large enterprises.

Investment banks specializes in large and complex financial transactions.

Private banks offer a personalized financial and banking service to high -net worth individuals

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