The US banking is one of the biggest and the oldest businesses in America. Though none of us can think about a day without banks, we know little about banks.
If you take a look at the history of American business, you can see that banks are one of the oldest businesses in the country. The Bank of New York is a perfect example, as it was founded in 1784. In 2009, the Bank of New York celebrated its 225th anniversary. Without any doubt, US banking system are one of the largest, oldest and most significant industries. When it comes to most adult Americans, they depend on Banks for their day to day financial transactions and needs. Despite all these, banking system still looks mysterious to most of us. How do banks work? What role they play in our economy? Do banks create serious financial problems for the country as in the 2007 crisis? Well, let’s take a closer look at it below for better understanding of the banking sector in the US.
First and foremost, let’s examine the main functions of banks in the country. The very first function is to operate a payment system. As we all know, without the presence of an efficient payment system, a modern economy might collapse. As far as our payments are concerned, we largely rely on checks, credit cards and online banking. Speaking of the stock money in the country, it is in fact the bank money. The rest of the currency is nothing but notes and coins from Federal Reserve issued by the government. We all rely on the bank money as we can use it wherever we want and it is trusted by all. Banks are meant to keep the money until we need it. USA Continues to Face Troubles when it comes to the job market and you can read more about it here.
This is the second key function of banks. What do you mean by financial intermediation? Well, here we are referring to investing or lending money. This money can be used for several purposes, including creating enterprises, businesses, governments and households. Here we are basically talking about the business side of the banks. When we take a look at the functioning of banks, we can see that most of them are profit seeking entities. Banks work like corporations in the share market. The Banks make profit by lending money to the needy for a higher interest rate. They will provide less interest for the money they are allowed to keep with them as deposits. This intermediation function of the banks is really important, even for the overall economy. This kind of drives the overall economy. This system helped create generations of entrepreneurs in America and we have to applaud the system for doing that. Basically, these entrepreneurs helped build American economy. This system also helps the ordinary business to survive. However, one cannot forget the fact that it is an inherently risky business. There can be several red flags. For example, what if the borrowers are unable to repay the loan with interest? This can lead to the collapse of the bank itself. So, in short, American banking system is highly relevant to the overall growth of the economy. At the same time, the economy might suffer in the fall of the banking system as both are interconnected. This makes it highly risky.