Core definition of a bank

Summary

A bank is a financial institution that accepts deposits from the public and creates demand deposits while making loans. Lending can occur directly through the bank’s own activities or indirectly through capital markets. Because banks are central to financial stability and a country’s economy, most countries regulate them heavily. In modern banking systems, banks commonly operate under fractional-reserve banking, meaning they hold liquid assets equal to only a portion of their deposit liabilities. Banks are also typically required to meet minimum capital requirements under international standards such as the Basel Accords, helping ensure liquidity and resilience. In practice, banks also act as payment agents (e.g., through checking/current accounts and payment networks), borrow funds by taking deposits and issuing debt, and generate revenue largely through the spread between the cost of funds and the interest charged on loans.

Key Points

• 1

  A bank accepts public deposits, creates demand deposits, and makes loans (directly or via capital markets).

• 2

  Banks are heavily regulated because they are crucial to financial stability and operate under fractional-reserve and capital requirement frameworks (e.g., Basel Accords).