Cash, credit, and other financial transactions for both individuals and businesses are dealt with by those who work in banking. Because it provides the liquidity that enables families and businesses to invest in the future, banking is one of the major forces behind the US economy.
Banking Definition and Examples
Banking entails a variety of activities carried out by a variety of financial institutions that accept deposits from individuals and other entities, then use the funds to make loans, invest, and make a profit. Depending on the kind of business they handle, banks can be categorised into a number of different groups. Both businesses and individuals can use the services provided by commercial banks. Retail banking is a tool that individuals and families can use to manage their finances, obtain credit, and make deposits.Banking in the Community
Community banks' sizes are different from those of commercial banks. They only pay attention to the neighbourhood market. They offer more personalized service and cultivate long-term relationships with their clients.Banking on the Internet
Through the internet banking system, these services are accessible. This sector is referred to by the terms e-banking, online banking, and net banking. The majority of other banks now provide online banking services. There are a lot of banks that only operate online. They can pass cost savings to the customer because they don't have any branches. Many banking services, like online banking, can now be completed entirely through your phone's digital device. Banking and investing apps are becoming increasingly popular, and you may never need to visit a physical bank again.Banking Services: Savings and Loans
Savings and loans are specialized banking entities designed to encourage purchasing a home at a reasonable price. These banks frequently charge higher interest rates to depositors in order to raise capital for mortgage lending.Credit unions
Credit unions are financial institutions that, in many ways, resemble traditional banks but have a different structure. Credit unions are owned by their members. Because of their ownership structure, they can offer low-cost, more personalized services. To join, you must be a member of their membership field. This could include employees of businesses or schools and residents of a specific geographic area.Banking on investments
Investment banking helps companies raise money through initial public stock offerings (IPOs) or bonds. They also make mergers and acquisitions easier. Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, Wells Fargo, Charles Schwab, and Morgan Stanley are among the largest investment banks in the United States. Investment banks became commercial banks after Lehman Brothers failed in September 2008, signaling the start of the late-2000s global financial crisis. As a result, they were able to receive government bailout funds. In exchange, they must now follow the regulations of the Dodd-Frank Wall Street Reform and Consumer Protection Act.Banking for merchants
Small businesses can use merchant banking to get similar services. They offer products such as mezzanine financing, bridge financing, and corporate credit.Banking according to Sharia law
Sharia banking abides by Islam's prohibition on interest rates. Furthermore, Islamic banks do not lend to businesses that deal in alcohol or gambling. Instead of paying interest, borrowers profit-share with the lender. As a result, Islamic banks avoided the risky asset classes that contributed to the financial crisis of 2008.What Is the Process of Banking
Savings accounts, certificates of deposit, and checking accounts are all safe places to deposit excess cash and manage money. They are protected by the FDIC (Federal Deposit Insurance Corporation). Banks also pay savers a small percentage of the money they deposit in the form of interest. Currently, banks are not required to hold any percentage of each deposit on hand, but the Federal Reserve has the authority to change this. The reserve requirement is the name of that law. They profit by charging higher interest rates on their loans than they do on their deposits.The Central Bank
Without central banks, banks would be unable to provide liquidity. The Federal Reserve is the central bank in the United States, but central banks exist in almost every country. The Federal Reserve controls the amount of money that banks can lend in the United States. There are four main tools available to the Fed: The Fed buys and sells securities from its member banks in open market operations. It adds to the money supply by purchasing securities. A bank's reserve requirement allows it to lend up to its entire deposit balance. The Fed funds rate establishes a target interest rate for banks. That is the interest rate charged by banks to their most valuable clients. The discount window allows banks to borrow money in order to maintain liquidity and stability. Note: Banking has become extremely complicated in recent years. Banks have dabbled in complex investment and insurance products. The banking credit crisis of 2007 resulted from this level of sophistication.Important Events
When Congress repealed the Glass-Steagall Act, the banking industry experienced a period of deregulation. This law had made it illegal for commercial banks to use ultra-safe deposits for high-risk investments. The lines between investment banks and commercial banks blurred after it was repealed. Some commercial banks started to invest in derivatives like mortgage-backed securities. Depositors were alarmed when they failed. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 resulted in yet another deregulation. The Act removed interstate banking restrictions. Large regional banks were able to become national as a result of this repeal. As they competed for market share, the big banks ate up the smaller ones. A small number of large banks controlled the majority of the banking industry's assets in the United States by the time of the 2008 financial crisis. As a result of the consolidation, many banks became too big to fail. They were forced to be bailed out by the federal government. The banks' failures would have jeopardized the US economy if it hadn't.Important Points to Remember
- Individuals and businesses can take advantage of banking's savings, loans, and investment products and services.
- Banks, or financial institutions, come in a variety of shapes and sizes, each with its own set of functions and target audiences.
- A central bank, such as the Federal Reserve in the United States, regulates banking on a national level in order to maintain liquidity and economic stability.
- If banks are left unregulated, they compete in an open market, which has proven to be risky in the past and resulted in numerous financial crises.
