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Banks as financial intermediaries

The illustration shows the circular transactions between savers, banks, and borrowers. Savers give deposits to banks, and the bank provides them with withdrawals and interest payments. Borrowers give repayment of loans and interest payments to banks and the banks provide them with loans.
Banks act as financial intermediaries because they stand between savers and borrowers. Savers place deposits with banks, and then receive interest payments and withdraw money. Borrowers receive loans from banks and repay the loans with interest. In turn, banks return money to savers in the form of withdrawals, which also include interest payments from banks to savers.

How are banks, savings and loans, and credit unions related?

Banks have a couple of close cousins: savings institutions and credit unions. Banks, as explained, receive deposits from individuals and businesses and make loans with the money. Savings institutions are also sometimes called “savings and loans” or “thrifts.” They also take loans and make deposits. However, from the 1930s until the 1980s, federal law limited how much interest savings institutions were allowed to pay to depositors. They were also required to make most of their loans in the form of housing-related loans, either to homebuyers or to real-estate developers and builders.

A credit union is a nonprofit financial institution that its members own and run. Members of each credit union decide who is eligible to be a member. Usually, potential members would be everyone in a certain community, or groups of employees, or members of a certain organization. The credit union accepts deposits from members and focuses on making loans back to its members. While there are more credit unions than banks and more banks than savings and loans, the total assets of credit unions are growing.

In 2008, there were 7,085 banks. Due to the bank failures of 2007–2009 and bank mergers, there were 5,571 banks in the United States at the end of the fourth quarter in 2014. According to the Credit Union National Association, as of December 2014 there were 6,535 credit unions with assets totaling $1.1 billion. A day of “Transfer Your Money” took place in 2009 out of general public disgust with big bank bailouts. People were encouraged to transfer their deposits to credit unions. This has grown into the ongoing Move Your Money Project. Consequently, some now hold deposits as large as $50 billion. However, as of 2013, the 12 largest banks (0.2%) controlled 69 percent of all banking assets, according to the Dallas Federal Reserve.

A bank’s balance sheet

A balance sheet    is an accounting tool that lists assets and liabilities. An asset    is something of value that is owned and can be used to produce something. For example, the cash you own can be used to pay your tuition. If you own a home, this is also considered an asset. A liability    is a debt or something you owe. Many people borrow money to buy homes. In this case, a home is the asset, but the mortgage is the liability. The net worth    is the asset value minus how much is owed (the liability). A bank’s balance sheet operates in much the same way. A bank’s net worth is also referred to as bank capital    . A bank has assets such as cash held in its vaults, monies that the bank holds at the Federal Reserve bank (called “reserves”), loans that are made to customers, and bonds.

Questions & Answers

i don't understand it
Asare Reply
in one page explain the concept of market failure
Preshus Reply
where goverment fail to suppy need of poeple because there scarcity resorces .that lead Market to failure
LUMCADORH
what is Principle Economics
Hafiz Reply
outline price and production levels
Amokelane Reply
the disadvantage of monopolistic competition
Balam Reply
what is economics
Amara Reply
Economics is a social science which studies human behavior between ends and scarce means which has alternate uses
Evangelist
what is demand
Jattu Reply
what is windfall gain?
Bakshi
Demand may be defined as the amount of quantity of good and service which a consumer is willing to buy and with the ability to pay at a given price and ya a particular time
Afagami
What is captalizeg
Saminu Reply
What is socializing
Saminu
What is socializing
Saminu
What is socializing
Saminu
what is demand
Oforiwaa Reply
demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given period of time.
Modest
what is opportunity cost
Aboubakar Reply
what is gini coefficient?
Khalipha Reply
Never heard of that!!!!
Abdulrahmon
ive heard about it Actually i know it..
Shamamet
In that case, you have to help us.
Patrick
Another name for Absolute cost advantage
fatimah Reply
what is the difference between demand and supply
Peter Reply
what is the national income
Kamara Reply
oils and resources
Peter
it is the sum of all incomes earned by factors of production usually a year
C-Stixxs
What's current account?
Che Reply
Demand refers to goods and services that the buyer is willing and able to buy at a price over a period of time
Che

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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