Banks keep your money safe, give you interest on the money you put in your accounts, and help you borrow when you need it. They also provide services like credit cards and money transfers.
Banks are financial intermediaries that earn income from the securities they hold and fee charges for customer service (checking accounts, investment banking, loan servicing, and the origination and sale of other financial products such as insurance and mutual funds). They also recycle excess money within the financial system by borrowing short-term in markets where liquidity is plentiful and lending longer-term assets to those with higher credit quality.
As with any other firm, banks are subject to the risks of business cycles and can fail. When they do, the consequences can be widespread and devastating for customers, other firms, and the economy as a whole. This has led to special regulations and backstop facilities for failing banks such as emergency loans from central banks and explicit guarantees of depositors’ funds up to a certain amount.
The banking industry is a highly competitive one that has seen new players emerge such as insurance agencies, credit unions, check cashing companies and credit card companies compete for consumers’ dollars. This competition has increased the pressure on banks to generate revenues and earnings and may have contributed to a lowering of regulatory standards and in some cases a lack of depth of management. This can lead to problems that go undetected for extended periods of time.