Bank

Bank is a financial institution that accepts deposits or other forms of repayable funds, provides credit and financing, facilitates payments, and offers other financial services to individuals, businesses, governments, and other organizations. Banks play a central role in the financial system by intermediating between providers and users of capital and by facilitating the movement of money through payment and settlement systems.

Banks may conduct activities including deposit-taking, lending, payment services, foreign-exchange transactions, investment services, wealth management, and other financial activities, depending on their business model and applicable regulatory framework.

Functions

The principal functions of banks include:

accepting deposits;
providing loans and other forms of credit;
facilitating payments and settlements;
providing liquidity;
supporting financial intermediation;
offering foreign-exchange services;
providing financial and investment services.

Deposit-taking

Banks may accept funds from customers through deposit accounts.

Common types of deposits include:

demand deposits;
savings deposits;
time deposits;
certificates of deposit.

Deposits can provide banks with a source of funding for lending and other financial activities.

Lending

Banks provide credit to individuals, businesses, governments, and other borrowers.

Common forms of bank lending include:

mortgages;
personal loans;
business loans;
working-capital facilities;
credit lines;
syndicated loans.

Banks generally assess the creditworthiness of borrowers before extending credit and may require collateral or other forms of credit support.

Financial intermediation

Banks perform Financial intermediation by connecting providers and users of funds.

A simplified banking model involves accepting deposits or other funding and using those resources, together with capital and other sources of financing, to provide loans and investments.

Banks earn income from activities such as interest received on loans and securities, while incurring costs associated with deposits, funding, operations, and credit losses.

Liquidity management

Liquidity management is a fundamental function of banking.

Banks must maintain sufficient liquid resources and access to funding to meet withdrawals, payment obligations, and other liabilities as they become due.

Banks may hold cash, central-bank reserves, government securities, and other liquid assets as part of their liquidity management framework.

Asset-liability management

Asset-liability management (ALM) involves coordinating the characteristics of a bank's assets and liabilities.

Banks may manage:

maturity mismatches;
interest-rate exposure;
liquidity risk;
funding requirements;
currency exposure;
capital requirements.

ALM is particularly important because bank assets and liabilities often differ in their maturity, liquidity, and interest-rate characteristics.

Balance sheet

A bank's balance sheet generally includes assets, liabilities, and shareholders' equity.

Typical bank assets include:

loans;
securities;
cash and reserves;
other financial assets.

Typical liabilities include:

customer deposits;
borrowings;
issued debt;
other financial obligations.

Shareholders' equity represents the residual interest after liabilities are deducted from assets.

A simplified accounting relationship is:

$Assets = Liabilities + Shareholders' Equity$

Capital and capital adequacy

Bank capital provides a financial buffer against losses.

Regulatory frameworks may require banks to maintain specified levels of capital relative to their risk exposures.

Capital adequacy is intended to support the financial resilience of banks and protect depositors and the broader financial system.

Credit risk

Credit risk is the risk that a borrower or counterparty will fail to meet its contractual obligations.

Banks manage credit risk through measures such as:

credit assessment;
lending standards;
collateral requirements;
diversification;
credit limits;
loan monitoring;
provisioning.

Interest-rate risk

Banks may be exposed to Interest rate risk because the interest rates or repricing characteristics of their assets and liabilities can differ.

For example, a bank with long-term fixed-rate loans funded by liabilities that reprice frequently may experience pressure on its net interest income when interest rates increase.

Operational risk

Banks are exposed to operational risks arising from failures or inadequacies in processes, systems, personnel, or external events.

Operational risks may include:

technology failures;
cybersecurity incidents;
internal fraud;
processing errors;
business interruptions.

Banks generally use internal controls, risk-management systems, and business-continuity measures to manage these risks.

Payment systems

Banks provide and participate in payment and settlement services.

These may include:

electronic transfers;
card payments;
direct debits;
checks;
domestic payment systems;
cross-border payments.

Banks therefore form an important part of national and international payment infrastructure.

Types of banks

Banks may be classified according to their ownership, activities, customers, or institutional structure.

Examples include:

commercial banks;
retail banks;
investment banks;
central banks;
cooperative banks;
development banks;
savings banks;
digital banks.

A single institution may perform activities associated with more than one category.

Commercial banks

Commercial banks generally provide banking services to individuals, businesses, and other organizations.

Their activities commonly include deposit-taking, lending, payments, and other financial services.

Investment banks

Investment banks generally provide services related to capital markets and corporate finance.

Activities may include:

underwriting securities;
mergers and acquisitions advisory;
securities trading;
capital raising;
financial advisory services.

Central banks

Central banks are public institutions responsible for functions such as monetary policy, currency issuance, financial-system oversight, and provision of central-bank services.

Central banks may also provide liquidity to financial institutions under specified conditions.

Digital banks

Digital banks provide banking services primarily through electronic platforms such as websites and mobile applications.

Depending on the jurisdiction, digital banks may operate under banking licenses or other regulatory arrangements applicable to financial institutions.

Banking regulation

Banks are generally subject to extensive regulation because of their role in financial intermediation, payments, and the broader financial system.

Banking regulation may address:

capital adequacy;
liquidity;
risk management;
consumer protection;
deposit protection;
anti-money-laundering requirements;
reporting and disclosure.

The specific regulatory framework varies by jurisdiction.

Deposit insurance

Some jurisdictions operate deposit-insurance systems that protect eligible deposits up to specified limits if a participating bank fails.

Deposit insurance is intended to protect depositors and reduce the risk of destabilizing withdrawals during periods of financial stress.

Bank failures

A bank may fail when it becomes unable to meet its financial obligations or maintain the capital and regulatory requirements necessary to continue operating.

Bank failures can result from combinations of:

credit losses;
liquidity shortages;
inadequate capital;
asset-value declines;
funding disruptions;
operational failures;
poor risk management.

Regulatory authorities may intervene through resolution, restructuring, liquidation, or other mechanisms provided by applicable law.

Role in the economy

Banks contribute to economic activity by providing credit, facilitating payments, mobilizing savings, and allocating financial resources among households, businesses, and other economic participants.

Bank lending can support consumption, business investment, infrastructure, housing, and working capital.

Importance

Banks are central institutions within modern financial systems. Through deposit-taking, lending, payments, liquidity provision, and financial intermediation, they connect savings with investment and facilitate economic transactions. Their financial condition can also affect broader economic and financial stability, making effective banking regulation and risk management important components of financial-system governance.