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The functions of banks

Updated on September 11, 2011

How is money created? Other than the currency and bills that are made in a national mint, the money that our nation uses on a daily basis is actually created by commercial banks in the form of deposits and other things.

A bank depends on the misfortune of its customers to create money. Someone must be in debt to commercial banks in order for money and credit systems to work. When a borrower spends the money he or she has been loaned, the recipient deposits it in another bank. That deposit represents the creation of new money. A bank pays its bills by borrowing if people don't pay their taxes. The interest that a bank charges customers on the loans it gives becomes that bank's profit. A customer's assets and liabilities add up equally. When a bank makes unnecessary profit, it makes for a burden on taxpayers.

The Federal Reserve processes checks and cash. Banks order cash from the Fed when they need it, and ship it cash when they have too much. Checks can even be processed cross-country; for instance, if someone from Los Angeles writes a check in Philadelphia, the Philly bank credits the person's account and sends the check to the Federal Reserve of Philadelphia, then the check is sent to the Federal Reserve of Los Angeles where it goes to the bank of Los Angeles. The Fed processes one third of all checks written in America. Many of them are deposited electronically. High-tech machines are used for all sorts of transactions. Fedwire is a program that allows money to be transferred over seconds. ACH allows for constant, direct payments. There are also machines designed to detect bill denominations, extent of use, and authenticity.

Banks can borrow money from the Fed as well, although it is considered a last resort lender. It acts to prevent too much borrowing. Types of loans are adjustment credit, for overnight loans or short-term problems; seasonal loans, which are extended up to nine months to help in seasonal swings in deposits and loans; and extended loans, which are prolonged because of financial difficulties if banks have a plan to correct the problems. Banks aren't allowed to take advantage of interest or discount rates and make profits by borrowing, either.

The Fed keeps the banking system competitive by creating new banks and mergers frequently. It examines bank information for security, and the banks themselves for safety. The Fed will fine banks, suspend employees, or pass new laws if they feel the need to.

There are 12 Fed district banks, member banks, and the Board of Governors, which heads the Federal Reserve. Each member of the Board is appointed to 14-year terms so the members are well insulated from outside political pressures. It is financially self-sufficient as a bank; it doesn't rely on Congress appropriations, but rather on interest from large holdings on US government securities.

The Board gives the Treasury the excess of what it took as opposed to what it spent. It sets reserve requirements (a monetary policy tool, along with discount rates and open-market operations); this is important because it affects the amount of loans and bank money commercial banks have. (Commercial banks are those that take deposits and give loans on an individual basis.) Reserve requirements are percentages of money or credit banks must keep on hand or on deposit at the Federal Reserve Bank.


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    • monicamelendez profile image

      monicamelendez 5 years ago from Salt Lake City

      Very nice report. I believe that there are plenty of reasons why you would need to borrow money, even if you aren't down on your luck.

    • profile image

      hezron 5 years ago

      banks do create money by giving out loans at a certain interest rate and we always assume that there are many banks so when a customer deposit 100usd at a certain bank and that bank will keep some amount of money as reserve and other amount will given out as loans.for more contact me by email;

    • profile image

      shivam 5 years ago


    • profile image

      umang srivastava 5 years ago

      nice report

    • profile image

      sakina mannir 5 years ago

      hi,my dear.

    • profile image

      jemalyn 5 years ago

      Thanks For The Info .

      It Helped me A Lot in Report :))

    • profile image

      roshini 5 years ago

      add some more details

    • profile image

      louil 6 years ago

      What are the functions of money ?

    • profile image

      She 6 years ago

      Wanted more information about different kinds of banks and functions - clearing, commercial, central

    • glassvisage profile image

      glassvisage 6 years ago from Northern California

      Thank you for the comments! Lee, very good point - perhaps that will be left to another Hub!

    • leeroper profile image

      leeroper 6 years ago from UK

      How is money created? - A good question to start off with and it’s surprising.

    • profile image

      raiz fd45 7 years ago

      Previously Credit Management was an aftermath of deposit management because interest rates on credits as well as deposits of individual banks were regulated.Now it is reverse.Each Bank is free to mobilise deposit from the market and each Bank has to decide at what rate to lift the deposit so as to maintain a healthy margin in credit. Deposits are plentily available but Banks are reluctant to lift them for 2 reasons-

      1) There is enough liquidity in the Banks and unless same

      are deployed profitably, it is silly to add more deposit.

      2) Banks are emphasizing on low cost Savings and Current

      deposits and in this segment there is pressure of mobili


      soni2006 13 months ago

      Thank you very much Bijan for your insightful details you have provided via this comment. I did not know that there was enough liquidity with the banks before you told me but when I related it with decrease in home loan and other interest rates today, then I came to the point that you are actually right. The banks or RBI has decreased the prime lending rate and thereby influencing other interest rates like mortgage loans and others because the banks have enough liquidity available and they are not looking much towards deposits because they have plenty of deposits and now they are looking towards lending money in different forms via home loans, car loans, and personal loans.

      Thanks to the decreased home loan interest rates as because of that, the real estate market is rising up again and there are a lot of people who are buying properties in India including Delhi and NCR as evidenced by the real estate and property market news.

    • profile image

      sexy karan 7 years ago

      nice one ??????????????????

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      klaboyy 7 years ago

      very good and well researched article. I love the way you use your terms. Thanks for sharing.

    • toneyahuja profile image

      toneyahuja 7 years ago from India

      Aha that is good one search swift codes of your banks transfer money

    • profile image

      justin 7 years ago

      Get a free visa debit card no joke just fill out 60 sec form and they send you your card load money whenever you want and you can even barrow money

    • profile image

      amorea13 7 years ago

      Super hub Glassvisage, really well-written and full of well-researched information on how banks effect their financial 'science' - thank you.

      I must say I have to agree with MikeNV when he points out the singular differences between 'OUR' money, 'money-of-exchange' (our blood, sweat, time, tears and talent money that we create every day through our work) and the 'money-of-account' created by the 'controlling' banks such as The Federal Reserve or The Bank of England etc, etc.

      Both of those vast banks are privately owned and their dictats and financial 'decisions' are not and have not for 100 years, been in the best interests of the citizen.

      It has been a colossal manipulation of some very complex issues which have been concealed in equally confusing numbers and economic 'mystery'.

      Sadly - for most of us - the whole system is about to collapse and it won't be the bankers who suffer the financial 'fall-out'.

      Your hub is excellent Glassvisage and you write so well. Thank you for giving me the stimulation to write my little reply.

    • MikeNV profile image

      MikeNV 7 years ago from Henderson, NV

      Sadly while most of us work for our money... commercial banks just create it with each and every loan. When will Americans ever wake up and realize that allowing banks to create money from nothing is the very reason prices continue to escalate over time at rates faster than real wages. This is exactly why the quality of life continues to decline. The "profits" of labor are going to those who do not earn them. I just linked to your hub, the more people are educated to the system the better.

    • Sexy jonty profile image

      Sexy jonty 8 years ago from India

      Very well written hub .....

      very much informative ......

      Thank you very much for your great hub, for good advice, good wishes and support. Thanks for sharing your experience with all of us.

    • glassvisage profile image

      glassvisage 8 years ago from Northern California

      Sigh! yes.

    • profile image

      issues veritas 8 years ago

      Because of the collapse of the economy and the tireless cranking out of new money by the government, the government and the banks are one.

    • bgamall profile image

      Gary Anderson 8 years ago from Las Vegas, Nevada

      I believe you have to spank the banks. That means take your money out, don't pay bad loans, and just basically leave the banks to their own devices. They have taken advantage and continue to take advantage of the middle classes, and therefore they should not be stealing taxpayer money. The reason they get away with it is because they are in control of our government.