Banks are financial institutions that provide a range of financial services to their customers, including deposit accounts, loans, credit cards, and investment products. Banks also act as intermediaries between depositors and borrowers, channeling funds from savers to borrowers.
Here’s a brief overview of how banks work:
- Deposits: Banks accept deposits from customers, which can include savings accounts, checking accounts, and certificates of deposit (CDs). Deposits earn interest, and customers can withdraw funds as needed.
- Loans: Banks use the funds deposited by customers to make loans to borrowers, such as individuals, businesses, and governments. Banks earn interest on these loans, which is how they make a profit.
- Interest rates: Banks set interest rates for both deposits and loans, which can fluctuate based on various factors, such as the overall economy, inflation, and the demand for credit.
- Credit risk: Banks evaluate the creditworthiness of potential borrowers before granting loans, using criteria such as credit history, income, and collateral. Banks also monitor borrowers’ repayment performance and may adjust the terms of the loan or take other action if a borrower is unable to repay.
- Regulations: Banks are subject to various regulations and oversight by government agencies to ensure their safety and soundness, as well as to protect consumers.
- Other services: Banks also provide a variety of other financial services, such as wealth management, insurance products, and foreign currency exchange.
Overall, banks play an essential role in the economy by providing a safe place for people to deposit their money, making loans to businesses and individuals, and supporting economic growth.