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Amidst the ebb and flow of economic tides, one steadfast cornerstone remains — the banking sector. Need to borrow some money to purchase a house? Have some money that you do not currently need and want to earn money while saving it? This is where banks come in.
Types of Banks and the services they provide
A bank is a financial institution licensed to accept checking, savings deposits and make loans. It has existed since the 14th century. The services of banks include individual retirement accounts (IRAs), certificates of deposit (CDs), currency exchange, personal loans, and safe deposit boxes. There are several types of banks including retail banks, commercial or corporate banks, and investment banks. Commercial banks feature high processing costs, making it less feasible for customers. Retail banks offer relatively low loan rates, meaning customers don't have access to high-value loans. Corporate banking is the more flexible one in terms of how much it offers its customers in loan amounts. An investment bank acts as an intermediary in large and complex financial transactions. It is usually involved when a startup company prepares for its launch of an initial public offering (IPO) and when a corporation merges with a competitor.
Banks take deposits from individuals or businesses, with the promise that the money can be withdrawn by the depositor later. Depending on the type of account, the bank may pay interest on the depositor’s money, or there may be penalties for early withdrawal. The bank is then able to lend the money it has on deposit to other individuals and businesses, receiving interest payments from the borrower in return. Therefore, a profit can be made on the difference between the interest rate that banks pay depositors and the higher interest rate that they charge borrowers. By law, banks cannot lend out all of the money in their possession, but are required by regulators to keep a certain amount of capital in reserve to cover withdrawals and other needs.
Importance of Banks in Economics
As the primary supplier of credit, banks provide flexibility for people with their money, as they are not required to take funds solely from their pocket for significant investments, such as purchasing homes and cars. This will allow people to invest in multiple areas simultaneously with limited funds, earning from multiple streams of income (such as earning from renting out homes), which will enable the individual to both have enough money to pay back the bank and earn profit.
Furthermore, the banking sector also provides many jobs . For instance, in 2022, FDIC-insured commercial banks alone employed nearly 2 million people in the United States.
Need for Regulation
However, with 76% of the global population in possession of bank accounts and depositing their money into banks, there are serious consequences riding on a bank’s ability to return the money to investors. As a result, banks are placed under strict regulations by governments, including requirements on lending limits, consumer protection and liquidity requirements. Banks must also submit periodic financial statements to promote transparency with supervising authorities (the government). In Hong Kong, the Hong Kong Monetary Authority (HKMA) is responsible for the authorization, regulation and supervision of banking business and the business of taking deposits.
Works Cited
Barone, A. (2024). How Banking Works, Types of Banks, and How To Choose the Best Bank for You. [online] Investopedia. Available at: https://www.investopedia.com/terms/b/bank.asp [Accessed 26 Sep. 2024].
Hargrave, M. (2024). Investment Bank: What It Is, How It Works, Major Examples. [online] Investopedia. Available at: https://www.investopedia.com/terms/i/investmentbank.asp. [Accessed 26 Sep. 2024].
Indeed Career Guide. (2024). A guide to retail vs commercial banking (with definitions). [online] Available at: https://uk.indeed.com/career-advice/career-development/retail-vs-commercial-banking. [Accessed 26 Sep. 2024].
International Monetary Fund. (2017). Banks: At the Heart of the Matter. [online] Available at: https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Banks). [Accessed 26 Sep. 2024].
World Bank Group (2024). The Global Findex Database 2021. [online] World Bank. Available at: https://www.worldbank.org/en/publication/globalfindex. [Accessed 30 Sep. 2024]
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