A private, for-profit institution that receives and lends money, exchanges it for other financial instruments (such as securities), and in some cases issues currency. Banks also offer many other services, including checking accounts and credit cards, to individuals and businesses. Some banks specialize in certain areas, such as investing or lending to small businesses. Others focus on consumer banking, offering savings and checking accounts and providing loans for mortgages, cars and college tuition.
Banks take in funds, called deposits, from those who have excess cash and then lend these to others who need them (borrowers). The difference between what the bank pays for deposit money and what it charges on its loans is the bank’s income. Banks also earn income from transaction fees and financial advice.
In addition to receiving deposits and lending, banks can raise funds by borrowing in wholesale money and capital markets. This complements their traditional sources of funding and allows them to diversify their risk exposure and increase the yield on their assets. Banks may also create money by repackaging loan assets into new securities and selling them to the market (a process known as liquidity transformation and securitization). The most important function of a bank, however, is to provide confidence and trustworthiness. Without this, a bank can quickly fail, even if it is solvent. Banks are regulated to minimize the risk of failure, and most governments insure their depositors’ money. In addition, they monitor their own risks and are required to keep enough capital to cover potential losses.
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