Banks and Credit Lending

A major task for banks is credit intermediation, ie channeling of funds from those who have a surplus of money (the savers) to those who need money to obtain real capital or receivables (the investors). Through its credit intermediation, the bank assumes the risk that is the responsibility of an investment. If the borrower fails to pay interest and installments, the loss will be borne by the bank, not by the depositor.

The banks obtain funds for loans by deposits from their own customers

The banks obtain funds for loans by deposits from their own customers

In recent years, inter-bank markets have also been developed in most countries. The individual bank can borrow in this market, ie from other banks. In the event of an emergency, the bank can also borrow from the central bank.

Normally, a larger portion of the deposits will be short-term, ie the depositors can cancel them and get cash out immediately or after a short time. In order to deal with a situation with large withdrawals, a significant portion of the bank’s loans must also be short-term.

In addition, the bank must have a cash balance

money cash

Cash, instructions, deposits with the central bank or other banks. In normal times, unexpected large withdrawals will not occur, and banks can therefore tie up part of their loans for a longer period than deposits. They can turn short deposits into long-term loans. (Credit-transformation). The banks thereby perform an important social function.

They bridge the gap between, on the one hand, the lenders ‘desire for a large degree of freedom of disposal over their collected funds and on the other the borrowers’ desire to secure a stable financing of their investments in facilities, buildings, ships, machines, inventories, education, etc. for such a transformation to be practiced is that every single day, only a small portion of depositors withdraw money into their deposit accounts, and others at the same time deposit money into their accounts.

This is the usual for payment settlements. For the banking system as a whole, therefore, within a short period, there will usually only be relatively small changes in the total deposit base.

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