Banking Basics: 10 Essential Things that ought to be understood before Signing Up

Banking basics are the ideas and rules that guide the banking industry. Banking is a business that engages with credit, cash holding, investments, and other financial operations. Because it directs cash to borrowers with profitable projects, the banking industry is one of the most important drivers of most economies.

A bank is a financial institution that receives customer deposits and avails loans to people and businesses. Banks charge a greater interest rate on loans than they do on client deposits.

How the Banking System Functions

Banks may be mandated to keep 10% of client deposits as reserves, while the remaining 90% is used to offer loans and may vary as per the rules of the central.

The Federal Reserve Governing body sets the specific reserve requirement. When the Fed lowers the reserve requirement for member banks, it is conducting an expansionary monetary policy, which means it is increasing the quantity of money in the economy. When the reserve requirement is raised, it is executing a contractionary monetary policy that lowers liquidity.

Banks are insured and customer deposits are protected up to specified amounts as per the rules set by the Fed or central bank. In the United States, the Federal Deposit Insurance Corporation (FDIC) does that.

Types of Bank Accounts

Here are some bank account types:

• Savings account. A savings account is one in which a client may deposit money that they do not need at the time but can opt to withdraw on demand. The bank lends that money out to borrowers and charges interest on the credit given to borrowers.

• Checking bank account. Commonly used by businesses. A checking account permits users to easily access their deposited monies and use them for financial operations such as bill payments. Consumers can gain access to their funds by writing a check, withdrawing money, making payments using debit cards, or setting up automatic transfers to other bank accounts.

• A certificate of deposit bank account is an account also known as a current account in some countries. In a current or certificate of deposit bank account, a set amount of money is retained for a set length of time, such as six months, a year, two years, and so on. It pays a set rate of interest on the amount kept. Users will only withdraw funds after the stipulated period however they may opt to withdraw and pay a penalty.

Types of Banks

Some of the most common ones are:

• Commercial banks. Are the most prevalent form of bank. They offer a variety of services to both people and private enterprises, including business loans, deposit acceptance, and basic investment products. Other financial services provided by commercial banks include worldwide commercial services, retirement products, merchant services, insurance products, as well as treasury services. They generate money through making business loans to individuals and corporations and earning interest on them, as well as charging fees for services such as bill or utility payments. Examples include Barclays Bank and HSBC.

• Credit Unions. A credit union is a cooperative (a form of a bank) that only accepts members from a certain group of individuals. It is a member-owned organization that operates on the principle of people offering a helping hand to people. Credit unions have traditionally serviced inhabitants of a certain neighborhood, members of a church, workers of a specific firm or institution, and so on. Credit unions’ ownership structure enables them to provide more customized and reduced banking services to their members. Credit unions may pay greater interest rates than banks because of their smaller operational size, and clients might develop a better relationship with the banking staff. On the downside, credit union activities are restricted, and consumer deposits are less accessible.

• Investment Banks. These are typically financial institutions that offer corporate customers access to obtain cash for expansion. They assist businesses in raising cash in the stock and bond markets to finance growth, company mergers or acquisitions, or other specified financial goals. They also help in mergers and acquisitions by identifying firms that are viable for purchase and satisfy the buyer’s criteria. These banks are known to earn money by providing corporate customers with consulting services, trading in financial markets, and representing clients in mergers and acquisitions. Examples of major investment banks in the United States include City Bank, J.P. Morgan, Merrill Lynch, Bank of America, and Goldman Sachs.

Conclusion

Deposits and withdrawals, currency exchange, forex trading, and wealth management are just a few of the services provided by banks. They also serve as a bridge between depositors and borrowers utilizing cash deposits by their clients to avail credit to those who wish to borrow.

Banks generate revenue by charging interest on loans thus benefiting by charging a greater interest rate than they pay on client deposits. They are bound by the rules imposed by the central bank in the territory or country of operation.