Banking System: Definition and Compounds

A lot of students apply for a degree in finance knowing absolutely nothing about the field. Luckily, I got your back starting with one of the essentials – banking system. By definition, it is a number of institutions connected into a network that provides financial services for people and businesses (companies, firms, organizations, you name it).

Banking system is responsible for intermediation between those who need money and those who have money to deposit. It’s also the interest-based entity, gaining profit from the interest rates their clients give them in return for using their functions. Some of them are: payment services, mortgages, loans, deposits, investments, currency exchange, etc.

The wellbeing of the banking system of a particular country is very important for the health of its economy. This includes not only the work of the banks but also insurance and financial companies, and other institutions that in one way or another are responsible for the flow of money.

Main Types of Banks

There are three types of banks:

  • Commercial;
  • Investment;
  • Central.

Essentially, these are two types (commercial and investment banks) regulated by the third (central). They all perform different functions and are crucial parts of a well-working banking system.

Commercial Banks

Commercial banks are the closest to the general public, as they are managing deposits in different currencies, money withdrawals, and various kinds of loans. The latter are usually short-term and given out to owners of small businesses or regular people for personal needs.

Investment Banks

Investment banks are responsible or financial operations on a larger scale. Its specialization includes managing acquisitions and mergers, underwriting, intermediation in the financial affairs between two or more businesses, etc. Some institutions work only in a certain field of business or only with a certain type of transactions.

Central Banks

Central banks specialize in maintaining and correcting monetary policy and inflation. Their responsibilities also include the stability of the currency of their country, as well as money supply as a whole. At some level, these banks regulate the financial situation of the state, as well as the affairs of all other banks, no matter their specification.

Banks can be of a brick-and-mortar or online basis, and both are widely used nowadays. While the latter provide lower fees and higher interest rates, they are considered less stable and trustworthy by some. However, profitable rates and fees, as well as the overall convenience of using a certain bank are the main factors influencing a client’s choice.

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Alex