Banking

Banks have been around almost as long as trade itself. The word bank comes from the Italian word banco, which means desk. Florentine bankers during the Renaissance transacted business over a desk covered by a green cloth.

Banks provide financial services to individuals and businesses for profit. Commercial banks take deposits, meaning they hold a customer’s funds, and then use that money to make loans to other customers. While the bank pays some interest on deposits, it charges more for the money it loans out. The difference between these two interest rates makes up the majority of the revenue for a bank, but they have other ways to general profits.

Banks may sell insurance, investments, or they may act as stockbrokers. Banks that issue credit cards make money off the interest charged on outstanding balances. Another source of income for banks is fees. They may charge account service fees, wire transfer fees, foreign exchange fees, or other small charges for various other services.

Most banks are regulated. Because banks are a crucial part of most economies, governmental or regulatory bodies make sure that standards are maintained. Banks allow individuals to keep money in safekeeping, but their economic impact is more tied to ways they help businesses. Money borrowed from banks allows all sizes of companies to buy inventory, build facilities, and pay employees.

Another key function of banks is mortgage lending. Home ownership is an important indicator of a healthy economy and community. Without banks, far fewer families would realized the dream of home ownership.

Not all banks are commercial banks. There are specialty banks that provide all kinds of other services. Community banks are smaller banks that make decisions locally to directly affect their local area. The term community development bank usually refers to a bank that specifically serves disadvantaged populations or impoverished communities. On the other end of the spectrum, a bank that caters to high net worth individuals is called a private bank. Offshore banks are often found in places with favorable tax laws. An investment bank underwrites stock and bond issues, makes trades, and helps businesses with market decisions like buying or selling other businesses.

Banks face many risks, which can result in crises in the banking system. If too many depositors want to take out their money at once, the bank faces a liquidity problem. In other words, it might not have enough money. This happened during the Great Depression. They face credit risk that borrowers won’t pay back funds, as well as interest rate risk. Aside from the risks, banks are some of the most profitable companies in the world.

 
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