A business that allows people to borrow money and ==safety deposit== their money.
By ==transferring== their money to a bank, individuals and enterprises are able to have their money guarded by others at lower costs than guarding it themselves.
The system of ==financial intermediaries== enabling many people to spend money that belongs to many other strangers for ==investments== or consumer purchases.
==Commercial banks== of course charge interest for this service but, because economies of scale and risk-pooling make the commercial banks’ costs lower than that of their customers, both the banks and their customers are better off financially because of this shifting of risks to where the costs of those risks are lower.
Banks not only have their own ==economies of scale==, they are one of a number of ==financial institutions== which enable individual businesses to achieve economies of scale—and thereby raise the general public’s standard of living through lower ==production costs== that translate into lower prices.
Businesses typically do not apply for a ==separate loan== each time their current incomes will not cover their current obligations.
In a ==complex modern economy==, businesses achieve lower production costs by operating on a huge scale requiring far more labor, machinery, electricity and other resources than even rich individuals are able to afford.
Most ==giant corporations== are not owned by a few rich people but draw on money from vast numbers of people whose individually modest sums of money are ==aggregated== and then transferred in vast amounts to the business by financial intermediaries like banks, insurance companies, mutual funds and pension funds.
Many individuals also transfer their own money more directly to businesses by buying stocks and bonds, but that means doing their own risk assessments, while others transfer their money through ==financial intermediaries== who have the expertise and experience to evaluate investment risks and earnings prospects in a way that most individuals do not.
In short, economies of scale enable banks to guard wealth at lower costs per unit of wealth than either private businesses or homes, and enable the ==Federal Reserve Banks== to guard wealth at lower costs per unit of wealth than private banks.
Individuals decide whether to put their money into an ==insured savings== account, into a ==pension plan==, or into a ==mutual fund== or with ==commodity speculators==, while these financial intermediaries in turn evaluate the riskiness and earnings prospects of those to whom they transfer this money.
Banks also finance consumer purchases by paying for credit card purchases by people who later reimburse the credit card companies and the banks behind them, by paying ==monthly installments== that include interest.
The ==banking system== is thus a major part of an elaborate system of financial intermediaries which enables millions of people to spend money that belongs to millions of strangers, not only for investments in businesses but also for consumer purchases.
Fractional Reserve Banking: The requirement for banks to hold a fraction of ==reserve money== to cover deposits, using the remaining ==capital== for ==lending.==
Since all the ==depositors== are not going to want their money at one time, the bank lends most of it to other people, in order to earn ==interest== on those loans.
Since some of these bank credits are re-deposited in other banks, additional rounds of expansion of the money supply follow, so that the total amount of ==bank credits== in the economy has tended to exceed all the hard cash issued by the government.
One of the reasons this system worked was that the whole banking system has never been called upon to actually supply cash to cover all the ==checks== written by depositors.
While most depositors are not going to ask for their money at the same time under normal conditions, there are special situations where more depositors will ask for their money than the bank can supply from the cash it has kept on hand as ==reserves==.
A bank may be perfectly sound in the sense of having enough assets to cover its ==liabilities==, but these assets cannot be instantly sold to get money to pay off the depositors.
Insecure ==property rights== are just one of the things within the control of government that has a major impact on the risks of banking, because banks are almost invariably regulated by governments around the world, more so than other businesses, because of the ==potential impact== of banking crises on the economy as a whole, the specific nature of that regulation can increase or decrease the riskiness of banking.
Financial institutions have even more ==incentives== to engage in risky behavior after having been insured, since ==riskier investments== usually pay higher rates of return than safer investments.
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