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How do banks work? – 5 key functions of a bank

How do banks work? On the outlook, banks might seem to be a repository of your money. A mere storage of peopleā€™s and institutionsā€™ money. In reality, there is a lot more to it. Banks are financial institutions that offer a variety of financial services. These services offered by Banking institutions consist of various plans and reforms to benefit the citizens of the country.

Banks exist to facilitate the flow of money and credit in an economy. They provide a safe place for people and businesses to store their money. And they make loans to individuals and businesses to help them invest, grow, and achieve their financial goals. Banks also play a critical role in the payment system. They allow people to write checks, use debit and credit cards, and make electronic transfers.

Here is a breakdown of the key functions of a bank and how banks work:

  1. Accepting deposits: Banks take deposits from customers, which can be in the form of savings accounts, checking accounts, certificates of deposit (CDs), and money market accounts. Deposits are insured by the Federal Deposit Insurance Corporation (FDIC) in the United States, up to a certain amount, to protect customers in case of bank failures.
  1. Making loans: Banks use the deposits they receive from customers to make loans to other customers, including individuals, businesses, and governments. Banks charge interest on loans, which is higher than the interest rate they pay out on deposits. This difference, known as the net interest margin, is a primary source of revenue for banks.
  1. Offering other financial services: Banks also offer a range of other financial services to their customers, including credit cards, insurance, investment advice, and foreign currency exchange.
  1. Managing risk: Banks have to manage various types of risk, including credit risk (the risk of default on loans), interest rate risk (the risk of changes in interest rates), and liquidity risk (the risk of not having enough cash to meet the demands of customers).
  1. Regulated by the government: Banks are subject to extensive regulation by government agencies to ensure their safety and soundness. In the United States, for example, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency are responsible for regulating banks.

Overall, banks play a crucial role in the economy. They provide a secure place for people and businesses to deposit their money. And by making loans that enable people to buy homes, start businesses, and invest in their future.

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