Banks are the main financial intermediary in any economy. The activities of banks represent the channel through which changes in the money market are transformed into changes in the commodity market.

They, on the one hand, accept deposits, attracting money from depositors, or accumulate temporarily free cash. On the other hand, they provide deposits to a certain percentage to various economic agents (firms, households), meaning they give loans. Thus, banks are intermediaries in credit. Therefore, the banking system is part of the credit system.

The credit system consists of banking and non-banking (specialized) credit institutions. Non-banking credit institutions include:

  • funds (investments, pensions);
  • companies (insurance);
  • financial companies (loan and savings associations, credit unions);
  • pawnshops (all organizations acting as intermediaries in credit).


The modern banking system is two-tier. The first level represents the Central Bank. The second level is the system of commercial banks.

The Central Bank is the country's main bank. In the United States, it’s the Federal Reserve System, in the UK it’s the Bank of England, in Germany - Bundesdeutchebank, etc.

The central bank performs the following functions:

• is the emission center of the country (has a monopoly on the issue of banknotes);

• is the banker of the government (does the financial operations of the government, mediates treasury payments and lendings to the state);

• it is the bank of banks (commercial banks are customers of the Central Bank, which stores their reserves, controlling and coordinating their domestic and foreign activities);

• it is an interbank settlement center;

• stores the country's foreign exchange reserves (does the country's international financial transactions and monitors the balance of payments);

• defines and implements the monetary policy.


The second level of the banking system is made up of commercial banks. They include:

1) universal commercial banks;

2) specialized commercial banks.

Such banks may vary:

1) by objectives: investments (lending investment projects), innovations (issuing loans for the development of scientific and technological progress), mortgage (providing loans secured by real estate);

2) by industry: construction, agricultural, foreign, economic;

3) by customers: serving only firms, serving only the population, etc.

Commercial banks are private organizations that have the legal right to raise free cash and grant loans for profit. Therefore, commercial banks perform two main types of operations:

  • passive (for attracting deposits);
  • active (for issuing loans).


In addition to solvency, the bank must possess one more property - its liquidity, or the ability to give out to any number of depositors at any time, in cash. If the bank stores all deposits in the form of banknotes, then it has absolute liquidity. But storing money, unlike, for example, bonds does not give any income. Therefore, the higher the liquidity of the bank, the lower its income. The bank must carefully weigh the costs of illiquidity (loss of customer confidence) and the costs of not using available funds. The need to have more liquidity always reduces the bank’s income.