The Functions of Modern Banks

Imagine you had $5,000, but you had to keep it in your house. Since that’s a lot of money,

you might hide it in a secret place, but you probably would constantly worry about losing it,

or someone stealing it. Without banks, this is what we all would do. We would

have no place to store or grow our money. A bank is an institution that allows people

to deposit money into an account for safekeeping. People had historically been incentivized to start

a bank account with the promise that the bank will pay them interest over time for keeping

their money in the account, and in the past this interest had been substantial. But if that was

all banks ever did, they’d never make any money themselves, instead they would lose money having

to pay interest. But banks are also financial institutions licensed to make loans and offer

other services that earn money for both parties. When you go to a bank that you have an account

with, you can withdraw your money at any time, and you don’t have to worry about whether or

not the bank actually has money to give you. Banks offer many ways for people to save money. The four

most common ways are savings accounts, checking accounts, money market accounts, and certificates

of deposits, also known as CDs. Savings and checking accounts often pay interest at an annual

rate. These accounts offer hardly any risk, but the financial cost is that the interest is very

low. In other words, you can’t make much money through savings or checking accounts. Money market

accounts and CDs are special kinds of savings accounts that pay a higher rate of interest.

With money market accounts, you can withdraw a limited amount of money, but the interest rates

are not fixed; they can go up or down. With CDs, you get a guaranteed rate of interest,

but you can’t touch your money until the end of a certain time period. Let’s say you have $25,000

in a CD, and you can’t withdraw the money for two years, but you are guaranteed a 3% annual interest

rate. At the end of the first year, your CD will have earned $750. At the end of the second year,

when you can withdraw your money, your $25,000 will now be $26,522.50. It’s not a whole lot,

but it’s still extra money as a reward for saving. Perhaps the most important thing banks do is

provide loans. In fact, banks take the majority of customer deposits to lend to other customers

for a variety of loans. The difference between two interest rates is effectively the profit

margin for banks. By providing loans, banks help new businesses get started, and they help already

established businesses grow. When a business gets a loan, that business can create new jobs

by hiring new workers or investing in capital in order to increase production. A business

that gets a loan may also help other businesses grow. For example, say you and your friend want

to start a coffee shop. Your coffee shop will need supplies, like coffee beans and espresso machines,

so the farmers who grow coffee and companies that make espresso machines will also benefit. They may

even hire workers to expand their business. Banks also provide loans to consumers. For

example, they loan money to people so they can buy cars, which are expensive and difficult for

most to pay for all at once. Consumers also borrow money from banks to buy homes and pay for college.

Remember, this is how banks profit, as they earn money on the interest they charge to consumers.

This doesn’t mean just anyone can get a loan. Often, a consumer has to establish a good credit

score, which is a number that predicts how likely they are to pay back a loan on time. If a borrower

were to default, or fail to pay back their loans, the bank may lose a big part, or even the entire