The Basics of Banks

Nowadays, having money in the bank has become an absolute necessity. All we know is that we just need to deposit money there to secure it and withdraw it later. But how does this institution actually work? This section will provide you with the useful facts you should be aware of.

What is a bank ?

Unlike most people believe, the bank does not own the money that it will credit to your account. In fact, it creates them by creating, for example, goods or services that have the value of the amount to be credited to your account. Therefore, a bank is indeed a company that has the power to put money into circulation.

However, the latter will not forget that you will have to pay back the money that has been credited to your account, you have to pay it back with the consequent interest. Moreover, in formal language, we say that a bank has the power to "monetize claims." It creates money to be credited to an account, on the one hand, and, on the other hand, it creates a claim to the interested party who will have to pay back with interests.

Banks, a Balance to Respect

Indeed, there is a fundamental law that governs the economy: for each new good created, it is necessary to create the money that will be used to buy it. However, if there is more currency than goods, currency becomes worthless, which causes inflation. It was therefore necessary to circumvent this phenomenon by controlling the quantity of money created. This task falls to the Central Bank, the "bank of banks."

All banks have an open balance sheet at the central bank. The regulations require commercial banks to have a certain amount of money in this account in order to create money. This amount is constituted in "central bank money" and corresponds to the bank's "reserves." So if your bank runs out of money, it makes a loan to the central bank, which increases the interest on your side.

Banks are institutions that have the power to create money, regulate it and control its value.