The core function of a bank is financial intermediation, which involves acting as an intermediary between savers and borrowers. Banks accept deposits from savers (individuals/businesses with excess funds) and lend these funds to borrowers (those needing capital), while also providing payment services and safe storage for money.
Key aspects of this function include:
- Deposits: Accepting and securing funds from customers.
- Lending: Providing loans, credit lines, and mortgages to individuals and businesses.
- Payment Services: Facilitating money transfers, managing checking accounts, and providing debit/credit cards.
- Liquidity Creation: Transforming short-term deposits into long-term loans, which stimulates economic activity.
For commercial banks, this is focused on profit through interest rate spreads (lending at higher rates than they pay on deposits), while central banks manage the overall money supply.