Bank Definition
A bank is a financial entity that is permitted to accept deposits and provide loans. Banks can also offer financial services including asset management, currency exchange, and safe deposit lockers. Banks are classified into three types: retail banks, commercial or corporate banks, and investment banks. Banks are governed by the national government or central bank in the majority of nations.
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Understanding Banks
Banks are key to the economy because they provide essential services to both consumers and companies. They provide you with a secure location to store your cash as a financial services provider. You may execute typical banking operations such as deposits, withdrawals, check writing, and bill payments using a range of account types such as checking and savings accounts and certificates of deposit (CDs). You may also invest your money and earn interest in it. The Federal Deposit Insurance Corporation (FDIC) insures money in most bank accounts up to a limit of $250,000 for individual depositors and $500,000 for jointly held deposits. 1
Banks also give credit to individuals and businesses. The money you deposit at the bank—short-term cash—is lent to others for long-term debt, such as auto loans, credit cards, mortgages, and other debt vehicles. This process contributes to market liquidity, which generates money and maintains supply.
A bank’s purpose, like any other company, is to make a profit for its owners. The majority of banks’ owners are their shareholders. Banks do this by charging borrowers higher interest rates on loans and other debt than they do on savings accounts. For example, a bank that pays 1% interest on savings accounts while charging 6% interest on loans makes a 5% gross profit for its shareholders.
The size of a bank is defined by where it is located and who it serves, and it can range from tiny, community-based organizations to major commercial banks. As of 2021, there were slightly over 4,200 FDIC-insured commercial banks in the United States, according to the FDIC. 2
National banks, state-chartered banks, commercial banks, and other financial institutions are included in this total. Despite the fact that typical banks have both a physical location and an online presence, a new trend in internet-only banks appeared in the early 2010s. These banks frequently provide customers with better interest rates and cheaper costs. Convenience, interest rates, and fees are some of the variables that influence customers’ choice of bank.
How Are Banks Regulated?
Following the 2008 global financial crisis, US institutions came under increasing scrutiny. As a result, the regulatory environment for banks has become far more stringent. Banks in the United States are regulated on a state or national level.
They may be regulated at both levels, depending on the structure. A state’s department of banking or department of financial institutions regulates state banks. This institution is in charge of regulating things like permissible activities, how much interest a bank may charge, and auditing and inspecting banks.
The Office of the Comptroller of the Currency regulates national banks (OCC). The OCC primarily regulates bank capital levels, asset quality, and liquidity. As previously stated, banks that have FDIC insurance are also regulated by the FDIC.
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