Banks and other institutions play this critical role by performing services essential to the functioning of an economy. Safeguarding, transferring, lending, and exchanging money in various forms, along with evaluating the credit-worthiness of customers, are the main functions that banks perform. Learn more about the role that banks play in shaping economies, their importance in the modern, global economy, and why they are important for nations as a whole.
Banks and other institutions play a critical role in any nation’s economy by performing services essential to the functioning of any economy. Safeguarding, transferring, lending, and exchanging money in various forms, along with evaluating creditworthiness of customers, are the main functions that banks perform. Each of these roles has a ripple effect in the economy that helps keep money moving. In this article, we will discuss the economic functions of banking:
Banks are critical to the economy. The banking industry is a vital component to the individual, business, national, and global financial well-being. Although there are many ways that money moves around the economy, banks play a central role in establishing the financial environment. Transferring money to provide growth and stabilizing the monetary supply are important functions performed by banks. This industry builds and maintains financial relationships with customers of all sizes to supply financial products and services that stimulate economic growth. Lending by banks makes money available to consumers and businesses to make purchases they might not otherwise be able to make.
Banks issue money in the form of banknotes and current accounts subject to check or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash.
Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers' current accounts.
Banks move money. They move it between banks, between banks and individual customers, between banks and industry, between banks and governments, and sometimes between governments. Sometimes the sums involved are huge. This motion of money throughout the nation and the world allows businesses to have access to capital. With capital to invest, businesses expand, job creation occurs, products are manufactured, services are performed, and the economy grows.
The industry players produce an assortment of services from savings accounts to home and business loans and mortgages. Money is a medium of exchange and the basis of the modern economy. Banks play a huge role in the distribution of funds throughout society. Although there are many institutions involved in the movement of money today, banks remain fundamental to the flow of money that maintains local, national, and global economies.
Safeguarding the holdings of people may be the oldest bank function. Long before banks existed, people looked for ways to secure their valuables, whatever the medium of exchange. Many of these you may easily imagine. Banks are generally accepted and believed to be a safer place for parking money. In some societies, such as Babylonia about 2000 B.C., people began to store money in temples, perhaps because they thought others would be less likely to steal from houses of gods. Ancient records indicate that about 4,000 years ago temples were in the business of lending and exchanging money. At that time, temples were acting as banks.
You may think of a bank vault or a safe-deposit box when you think of safeguarding money, and those onsite measures are certainly ways of protecting valuable assets. Banks also offer locker facilities which is a guarded strong room where people can keep their valuables on paying a small amount of fee for hiring lockers.
Record keeping is an important part of securing your money. Banks devote much time and attention to both the practice and technology of maintaining and storing accurate records. If banks expect you to let them hold and use your money, you expect them to keep careful track of it. The same principle applies to large transactions between banks and industry and between banking institutions and the government.
Identification is an important security function of banking. Obviously, you do not want unauthorized people walking in and taking money from your account, but the issue of security and identification goes far beyond the local branch. Identifying theft is a growing concern in the economy, and bank officials work closely with technology experts and law-enforcement agencies to prevent various forms of identity theft.
Identity theft occurs when someone achieves financial gain by using another person's personal information to unlawfully assume the identity of the other person. An identity thief conducts transactions illegally for personal gain. With the increased reliance on the Internet for financial transactions, identity theft protections extend beyond conventional checking accounts to include online banking, automatic bill pay, and online shopping.
Enforcement is a part of safeguarding money that involves catching those who attempt to take it. Not only does this function involve physical security, but it also includes tracking down fraud, making collections, and pursuing legal actions against those who inflict losses on the bank. Robbers, white-collar embezzlers, or people who default on loans are all included in the group targeted by enforcement efforts.
Transfer security is important to banks. Although cash is still an important part of bank transactions, most money moves merely on computer screens. High-tech security measures are increasingly more critical to banking operations between banks and customers, between banks and banks, and between banks and the government. As all financial intermediaries become more dependent on electronic banking, technological security takes on a more significant role.
Sound business practices also safeguard your money. Most of these involve good judgment and management of daily bank operations. Banks invest time and money to train employees in procedures and practices. Training goals include ensuring accuracy, encouraging good decision-making regarding the credit-worthiness of prospective customers, and teaching how to make sound financial decisions. Federal and/or state bank examiners closely review the records of banks to protect consumers. Their examinations include not only the accuracy of records but also the prudence of banks' policies.
In international banking, exchange rates measure the relative strength of one form of a currency against another. These variable rates are often indications of the strength of a nation's economic position. The ability to transfer sums of money between financial institutions safely and effectively depends on the stability of the institutions, the stability of the countries where the banks reside, and the security of the money supply itself.
Banks play an important role in a productive economy, helping businesses and consumers take appropriate risks. Appropriate risk means that banks must lend money only to those who'll be able to repay those loans. A creditworthy customer has a good credit rating, sufficient collateral for loans, and an ongoing income source sufficient to make timely loan payments. Evaluating the creditworthiness of customers, whether they are large industries, governments, or individual consumers, is a critical banking function that affects the economy. Banks lend money to ordinary commercial and personal borrowers (ordinary credit quality) but are high-quality borrowers by evaluating loan applications carefully.
Banks must contribute to implementing positive changes to ensure consumer protection, transparency, and responsible lending. They need to work closely with regulatory bodies to help shape initiatives and regulations. They must also ensure they take appropriate risks in their lending activities. In most countries, banks and the government work together to form the banking system and to make sure the money supply is adequate, appropriate, and trustworthy. Much of this guarantee is backed through the central banking function of the Central Bank of the Country. Individual banks also work with the government to implement monetary policy, perform exchange functions for citizens, defeat counterfeiters of currency, and prevent identity theft.
The functions that banking institutions perform do more than move money through the economy. They also provide a common economic system that is built primarily on trust. A great part of an economic system is psychological. It is our belief and trust in the financial system that keeps the financial system going.
|Overview of Banking||What is Bank||Definition of Bank|
|History of Banking||Famous Banks||Gold Standard|
|Sectors in Banking||Segments in Banking||Different Types of Banks|
|Banking Transactions||Banking Operations||Banking Business Model|
|Banking Trends||Banking Value Chain||Banking Customers|
|Banking Functions||Bank Balance Sheet||Bank Revenue Model|
|Different Types of Payments||Modern Banking Products||Banking Regulations|
|Banking Projects||Banking Landscape||Risks in Banking|
|Types of Banks in India||Islamic Finance||Social Media in Banking|
|Digital Channels||Banking Challenges||Technology Risk|