Core definition of a bank

Summary

A bank is a financial institution that accepts deposits from the public and creates demand deposits while also making loans. Lending can occur directly through the bank or indirectly through capital markets. Banks are central to financial stability and economic activity, which is why most countries regulate them heavily. In modern banking systems, banks commonly operate under fractional-reserve banking: they hold liquid assets equal to only a portion of their deposit liabilities. To support liquidity and solvency, banks are typically subject to minimum capital requirements based on international standards such as the Basel Accords. In addition, a bank’s core functions include payment services (e.g., managing checking/current accounts and facilitating transfers), borrowing from depositors and other funding sources, and issuing new money through the process of lending.

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 vital to financial stability and the broader economy.

• 3

  Under fractional-reserve banking, banks keep only a portion of deposit liabilities as liquid reserves and must meet capital requirements such as the Basel Accords.