Bank is a business that keeps cash safe and lends it out, providing loans for individuals and businesses to make large purchases. Its basic business plan hasn’t changed since the Medici family started dabbling in banking in the 14th century, but the types of products and services that banks offer today are more diverse. You can choose from traditional banks, online banks and credit unions to find the right one for you.
Most banks are privately owned, profitmaking institutions. They earn interest on deposits and on securities they hold, as well as fees for customer services (such as checking accounts, financial counseling and loan servicing) and the origination, distribution and sale of other financial products such as insurance and mutual funds. On average, they earn about 1% of their assets (loans and securities) each year. They use their profits to replenish their capital; the stockholders’ stake in the bank forms most of its equity capital, which is a buffer against losses.
Governments have long recognized the important role of banks, regulating them to limit failures and the panic that they can cause. They generally require bank charters to conduct certain activities and back them with explicit or implicit government-guaranteed bailout facilities in the event of trouble. They also regulate the size and geographic spread of banks and encourage or discourage specific types of lending.
Banks are essential to modern economies, facilitating the flow of money throughout the economy. They keep cash safe from theft and from the risk of fires, floods or other natural disasters. Without them, businesses and consumers would have difficulty paying for goods and services, and the economy would grind to a halt.