Economic Function of a Bank

Banks provide specialised financial services which ultimately reduce the cost of obtaining information on both savings and borrowing opportunities. Through these financial services, the overall economy will be more efficient.Banks operate by borrowing funds, generally by receiving deposits or otherwise borrowing in the money markets. Banks can borrow from individuals, financial institutions, businesses and also borrow from governments having surplus funds.

Economy

Banks usually pay interest on deposits. If we are speaking of current accounts interest may be minimal and the majority of the banks do not give any interest at all. Interest on savings accounts can sometimes be significant.During the inflation period, interest rates on deposits are considered important as these can keep the real value of the amount being saved. In some cases, interest payments on savings being held with the banks are considered as a source of income for a number of individuals like for example pensioners.

Liabilities 

Such deposits that are to be considered as liabilities for the bank are then partially used to make loans or otherwise to buy securities so that these will be then considered as assets for the bank. These loans are usually issued to businesses, individuals, and sometimes even to governments that would need additional funds for further investment. These loans and business investments are considered important and will lead to economic growth.

Price signal  

Price signals for borrowers, lenders, and banks are determined through interest rates. The difference between the two interest rates is effectively part of the profit margin of banks. In fact, Banks can be more profitable by using a percentage of their deposits to lend to other customers. If banks pay 1 percent on deposits but on the other hand lend money to corporate or retail clients at a 3 to 4 percent interest the difference will be considered as profit on deposits.One should bear in mind that a bank cannot fork out all its deposits as loans as it needs to keep enough liquidity so that it will meet the demands of its clients to withdraw their own money from their accounts.

Reason of using bank services 

Another reason why clients opt to make use of banking services is that banks are seen as a secure place where one can keep his own money. In fact nowadays few are the individuals that keep cash at home. In medieval times there were instances where people used to pay Knights Templar (that were considered as early banks) so that they would keep their own money and assets safe.

Features 

Other features that are provided to consumers that also play an important role to the world’s economy are that one can easily have instant access to cash through for example ATMs. Banks can also provide advice on financial matters. Here banks can act as advisors, counsellors, and also agents for business and industrial organisations. They play an important role in the development of trade and industry.

Methods 

Banks provide alternative methods to make cross border payments. In fact, the banking system facilitates both internal and international trade. A large part of such trade is being done on credit.Banks will provide references and guarantees on behalf of their clients on the basis of which the seller will then supply goods on credit. This is crucial for international trade, especially when parties involved are unknown to each other and also are from different jurisdictions.

Payments 

A bank makes it easier for a complex economy to carry out the extraordinary range of transactions that occur in goods, labour, and financial capital markets. Banks play an important role and act as an intermediary in what is called a payment system which makes it easier for the economy to exchange goods and services for money.Banks have a key role in the creation of new capital in a country, which ultimately leads to economic growth. Banks take care of sale of shares and debentures meaning that business houses and manufacturers can fix capital through the intervention of the banks. There are specifically industrial banks which usually assist in the formation of new companies and new industrial enterprises by giving them long term loans.

COVID 19 

Even during the Covid-19 pandemic, banks in Malta were also involved in the process of reducing the pressure on the liquidity of businesses to save jobs and to help vulnerable people during such a challenging period.In fact, there were number of different measures that were introduced, mainly being subsidised and encouraged by local government that involved the intervention of local banks like for example having the local government offering guarantees through Malta Development Bank for loans that were granted by commercial banks to help businesses to meet new working capital requirements (mainly for businesses that were having cash flow disruptions) (mainly for businesses that were having cash flow disruptions).Moratoriums on capital and interest repayments were given. Terms of loans were also increased. There were interest rate reductions too. All these measures were all introduced to stimulate economic growth during such a challenging period.

Conclusion

The aim of the banking system is to ensure security and confidence in the economy. Authorities would need to make sure that banks will not go bankrupt so that consumers will not lose their savings, as this will cause widespread financial panic which will ultimately lead to having more clients making more withdrawals and holding more cash.

This will result in a shortage of funds available for lending, meaning that there will be stagnation within the economy. In every working country, there is a Central Bank which controls the activities of other Banks to try to avoid such scenarios. This is one of the main reasons for a high level of regulation over banks as banks play an important role in contribution within the economy and creation of financial stability.

Many countries have formalised their own systems known as fractional reserve banking, where banks will have to keep assets equal to the percentage of their current liabilities. Banks would need to follow minimum capital requirements that would be based on an international set of capital standards.