A bank is a financial industry that holds financial assets for other people and those who are planning to invest their savings. By doing so, the financial assets will be viewed as a leveraged way of creating and promoting wealth to others. Government agencies, insurance, mortgages, investor services, and also credit cards are the sectors in a banking institution. Have you ever imagine what would happen if there is no bank at all and people stop spending their money?
A bank is responsible for holding the assets (deposits) for its clients whereby they may withdraw the money in the saving account if the individual needs the assets. However, to avoid any devastating bank runs which may give some negative effect on the banking sector as a whole and shows the reason why it is necessary for a bank to maintain at least 8% of their book values as actual money. Only 10% of each of the deposit made to them should be kept and they also have the privilege of using the remaining money for loan purposes.
How bank leverages the money in their vaults as loans, earning money from the interest rates charged on all those loans. Interestingly, the true value of money lies on paper but the paper is somewhat giving some value that may grow the economy. Other than that, what can we see that this banking sector will always have the attempt in diversifying its risks and they are doing it by investing as much as they could. Why does it have to do so? Of course to prevent the unexpected loan default from sinking the entire bank which will definitely create a problem.
“So if everyone cut their spending back to the basics and did it immediately, the result would be an almighty recession- indeed, a depression,” Mr Eslake, A Former Chief Economy for ANZ Bank and Bank of America Merril said.
Governments have laws to prevent banks from engaging in such activities that may lead to any harm which would threaten the safety of the economy. Trust is the core that should be look up to in the banking sector. No gain means no one would be able to use that money to give loans, invest and making the economic growth continue to grow. In other words, regulation is the one that makes it mandatory in creating this so-called trust.