Banking Operations

© Vladimir Gerasimov -

For those trying to follow along with news of the economic collapse of 2008, they quickly found that America’s financial institutions are complex in their activities and banking operations can be mighty confusing. Things like credit default swaps or derivatives might as well be a foreign language to the average person, but by learning the basic operations banks perform it can help to understand the more these more complicated concepts can make sense.

To put it in the most simple terms, banks operate by taking in money from customers and lending it out to other customers. Those who give their money to banks receive an interest rate in return, and in exchange the bank has money to lend out to other customers at a higher interest rate. Those who want to deposit money in banks have a number of products to choose from, like checking and savings accounts. There are also certificates of deposit, which are made for set for a certain period of time, during which the customer cannot access the money. Banks also lend money in a number of ways, from home mortgages to car or small business loans. Aside from money functions alone, banks also provide a number of services to customers like issuing checks and debit cards, facilitating money transfers and providing safety deposit boxes for valuables.

Other than the basic lending and taking of money, banks also engage in a number of financial services. These “investment banks,” which differ from the traditional commercial banks, perform a number of more complex services like helping companies issue securities, investing and running mutual or pension funds and assisting in mergers or acquisitions. Within this side of banking, many institutions deal exclusively with corporations as clients.

It is through these more complex banking functions that came much danger to the economy. Operations between financial institutions became so diluted that many did not fully know what products they were selling or purchasing. Large bundles of investments that included likely-to-default mortgages were sold with artificially high ratings, leading the institutions holding these investments to not really understand what they entailed.