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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

Distinguish between cross elasticity and income elasticity of demand
Ruth Reply
what is the competitive demand
Adiza Reply
Income
Sanni
With regards to coal shortage and manicipal debts the what form of intervention do you think Eskom can put in place.
kedibone Reply
economic growth of Bhutan
Nima Reply
please, explain all the mathematics terms used in economics
nelson
what is the effect of inflation in GDP
ahmed Reply
Not only real GDP but also nominal GDP will decrease
Aqib
yep. Inflation has an influence not only GDP but interest rate also.
Hamza
The pound weakens so imports become more expensive and exports lose value - lower GDP.
Rebecca
why do inflation effect economic
Chelsea Reply
explain in detail what is economic what is scarcity what is alternate uses
Ejiro Reply
What is law of demand
Hilary
economic as a science refers to study of human resource
Kaunda
Law of demand- With all the factors remaining same if price increases of a commodity, the quantity of demand of that commodity decreases and vice versa
Dey
Thanks dey sunita
Hilary
What is law of supply
Hilary
what are the factors that affect demand
Elly Reply
what are the factors that affect demand of a good
Elly
what are the factors that affect demand of a good
Elly
what are the factors that affect demand of a commodity
Elly
1. the price of the product 2. the price of other products 3. consumers income 4. expectation of future changes in price 5. taste and preference etc.
ALI
Change in price
Hilary
1. price related of commodities 2. consumers income 3. the condition or season of the commodities
Tsai
decrease in demand of substitute increase in demand of constituent change in quantity and other environmental factors
Hamza
Nd consumer's income
Hamza
what course scarcity
Bashari Reply
Scarcity is the limited availability of a commodity, which may be in demand in the market or by the commons. Scarcity also includes an individual's lack of resources to buy commodities. The opposite of scarcity is abundance.
Marc
Reasons that explain why the division of labor increases an economy's level of production
Chukwuka Reply
Please I don't understand the meaning and the concept of economics as a science
Ophelia Reply
economics as a science refers to the study of human behavior. how they make decisions etc
Saidou
economics is science because it uses scientific methods in analysing societal problems.. observation experimentation and conclusion inherently are used to analyse. however it is not pure science but social science because it studies human and it's environs
Bonney
what's elasticity of demand
Isaac Reply
are u asking because you don't know or what
Stephen
A measure of the responsiveness of a product demanded to a change in market price
Yuusuf
the degree of responsiveness of a product demanded to a little change in the price
Saidou
the degree of responsiveness of quantity demanded of a commodity to the changes in the price if the commodity in question, changes in the price of other related commodities and changes in the income of consumer
Bonney
what is international trade
Kwame Reply
international trade is a trade between foreign country
IYke
it is the exchange of goods and services between countries
Bonney
it's the exchange of goods and services from one foreign country to another
Israel
how is demand run
Ogonna Reply
what s the causes of poverty for human being
Femi Reply
lack of knowledge and resources
Asrat
it is lack of inclusive political and economic institutions in that country given a strong central government.
tesfaye
luck of economics
Donkor
poverty is due to poor system of taxation
Hamza
progressive system of taxation can reduce poverty
Hamza
lack of knowledge
IYke
Isn't it poor system of taxation that causes poverty
Chukwuka

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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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