Banking: Functions, History, Risks, and Regulation

Definition and Core Functions of Banks

A bank is a financial institution that accepts deposits from the public, creates demand deposits, facilitates payments, and provides loans or other forms of credit. Banks serve as intermediaries between savers and borrowers, using deposited funds and other sources of finance to support lending and investment. Because banks are central to financial stability and economic activity, they are subject to regulations concerning liquidity, capital, reserves, and risk management. The core functions of banks include accepting current, savings, and term deposits; providing loans, advances, and overdrafts; processing payments through checks, cards, transfers, ATMs, and digital channels; and creating money when loans are issued in a fractional-reserve banking system. Banks also perform maturity transformation by borrowing mainly through short-term or demand deposits while providing longer-term loans, settle payments between customers and institutions, and generate revenue through interest spreads, transaction fees, and financial services.

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Deposits, Loans, and Money Creation

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