A bank is a financial institution that accepts deposits, extends loans, facilitates payments, exchanges currency, sets monetary policy and provides a variety of other financial services to individuals and businesses. While the basic business model hasn’t changed much since the Medici family dabbled in banking in Renaissance Italy, banks now offer many different products and services to meet the financial needs of consumers and businesses around the world.
Banks make money in several ways, including charging interest on the loans they extend and transaction fees for handling checks and other negotiable instruments. They can also borrow in the capital markets or by selling debt to investors, and can package their loans into securities and sell them in the market (a process called securitization). Banks can be small and local or global in reach.
Like any other business, a bank has to earn a profit for its owners, who are its shareholders. Historically, this was accomplished by charging more interest on loans than they paid on savings accounts, although this is not the only way to generate revenue for banks today.
Banks are regulated by governments in most countries, and their operations are subject to extensive supervision. They can face problems, such as loss of confidence or a reduction in demand for credit, that could hurt them. A failure of a large bank can have far-reaching consequences, freezing customer deposits and rupturing the lines of credit that businesses use to make payrolls or pay suppliers.