How does banks operate

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Analytics cookies We use analytics cookies so we can keep track of the number of visitors to various parts of the site and understand how our website is used. Skip to main content. Home KnowledgeBank What do banks do?

What do banks do? What sets high street banks apart from other businesses is the way they work with money. High-street banks are not that different from any other business.

Banks look after your money Keeping small amounts of money in your pocket to pay for things makes sense. Banks make sure your money is kept safe — and have served this role since ancient Greek and Roman times. They also lend money to those who need it. Banks help you pay for things Banks provide debit and credit cards so you can pay for things in the shops and online.

Over 9 in 10 adults make payments using a debit card at least once a month. Source: UK Payments Markets When you use a card to buy, say, food, the money is transferred from your bank account to the bank account of the shop.

Play Regulating the banking system video. Video transcript - Regulating the banking system. What else do banks do? Early bankers in Europe used benches as makeshift counters for banking transactions.

Find out more What does the Bank of England do? Why do we regulate banks? You may also be interested in Back to top. By: Lee Ann Obringer. Banks are critical to our economy. The primary function of banks is to put their account holders' money to use by lending it out to others who can then use it to buy homes , businesses, send kids to college When you deposit your money in the bank, your money goes into a big pool of money along with everyone else's, and your account is credited with the amount of your deposit.

When you write checks or make withdrawals, that amount is deducted from your account balance. Interest you earn on your balance is also added to your account. Banks create money in the economy by making loans. The amount of money that banks can lend is directly affected by the reserve requirement set by the Federal Reserve. US Government sponsored mortgage giants Freddie Mac and Fannie Mae were using lending ratios leverage closer to to 1.

Banks like high leverage because it allows them to make many loans, and therefore lots of money, with only a small amount of capital cash at stake. In good times, high leverage is a great way to make fantastic investment returns.

In bad times, though, even small losses in a highly leveraged bank can completely wipe its reserves and make it insolvent. Insolvency for many arrived by August when highly leveraged banks found themselves hopelessly over-extended as the U.

Census Bureau. Defenders of these giant bonuses claim they are justified by the fact that bankers are wealth-creators and risk-taking entrepreneurs whose achievements help the rest of the economy to thrive. But if wealth has been created, it does not appear to have been evenly spread. By , the US had the most unequal distribution of income and wealth of any major country, with the top 1 percent owning more wealth than the bottom 90 percent. John A. The risk-taking entrepreneurs failed, leading to the greatest destruction of world wealth since the devastation of World War 2.

But the collapse of the banking system under a mountain of debt may be seen as a symptom and not the cause of the financial crisis. It is the imbalance in trade and financial flows between the US and China that lies at the root of the banking crisis, some bankers believe, with the US and the West maintaining an unsustainable standard of living by going ever deeper into debt. Cheng Siwei, head of China's green energy drive, agrees. That's why we have this financial crisis.

It is made by real people working hard at real jobs. Actually, deep down we knew that all along. We just have to learn it again. Make Your Booking. How Banks Work Banks accept deposits and make loans and make a profit from the difference in the interest rates paid on deposits and charged for loans. Animation: how banks make money Click for non-animated image.

Animation: how banks work Click for non-animated image. A run on a bank in Berlin, 13 July Depositors clamour to withdraw their savings.