Deposits and loans. Economic functions of banks

Deposits and loans

Money that is not used directly, can be saved by households for later use. Companies that make major investments, they can not usually fully fund its own resources. By taking out loans, investments can be leveraged in part. The acceptance of deposits and other assets for safekeeping and lending form the classical basis of a bank.

Economic functions of banks

The banks fulfill three major economic functions (see also: financial intermediary) Lot size transformation (also: Concentration function): Banks to create a balance between the supply of many relatively small deposits and the demand for large loans. Transformation of many of very small savings amounts to large credit packages. Provision of savings and credit needs of different time horizons. The banks achieved by pooling. A pool is ever the sum of the deposit and the sum of the loans.
Maturity transformation (also called extension function): The strict interpretation of the golden rule of banking is no longer in full, since a certain percentage of short-term deposits can be rented long term. During the period transformation following aspects to consider:
-Liquidity problems
-Income problems
-Interest rate risk
-Risk of a bank run

Risk transformation (also called confidence function): The depositor confidence in the care and expertise of the bank in lending, even in terms of risk diversification. Provision of savings and credit needs with different risk tolerance. This they achieved by:
-Portfolio Education
-Monitoring of credit
-Liability to equity
-Contracts with savers and borrowers

In the field of creation of money commercial banks play a role insofar as they feed through loans from the central bank money to the economic cycle, which is covered only partly by deposits. Through investment of capital with the central bank can escape the economic cycle money. Concerning the economical functions of banks, see: banking.