Essence of banking

• Author: Kaltrina Shkodra
• Pages: 234-243

Vol. 4 No. 2

June, 2020

European Journal of Economics, Law and Social Sciences

IIPCCL Publishing, Graz-Austria

ISSN 2519-1284

Acces online at www.iipccl.org

234

Essence of banking

Kaltrina Shkodra

Abstract

Financial systems perform the essential economic function of channeling funds from units

who have saved surplus funds to units who have a shortage of funds. The units who have

saved can lend funds: they are known as lender-savers. The units with a shortage of funds

mustborrowfundstonancetheirspendingtheyaretheborrowerspenders

In direct nance borrowerspenders borrow funds directly from lenders in the nancial

marketsbysellingthemsecuritiesInindirectnanceanancialintermediarystandsbetween

the lender-savers and the borrower-spenders: the intermediary helps to transfer funds from

one to the other.

Anotherimportantfunction ofanancialsystem isthemonetary functionTheintroduction

of money into the economy enables savers and spenders to separate the act of sale from

the act of purchase and allows them to overcome the main problem of barter, which is the

doublecoincidence ofwantseachof the twopartiesinvolved ina transactionhas towant

simultaneouslythegoodtheotherpartyisoeringtoexchange

Froma structural point ofviewa nancial system canbe seen in termsof the entities that

composethesystemAnancialsystem comprisesnancialmarkets securitiesandnancial

intermediaries.

Financial markets aremarkets in whichfunds aremoved frompeople who havean excess

of available funds (and lack of investment opportunities) to people who have investment

opportunities (and lack of funds).

Keywords: nancialsystembankingnancialmarket

Introduction

Inessencebanksarestraightforwardinstitutionstheytakeexistingdepositsandloans

to a small degree) and loan these funds, and, at the same time, make new loans

and create new deposits (new money). However, while their basic function may be

simpletheriskstheyassumearenotandthismakesthem complex

Privatesectorbanksplayasignicantroleinthenancialsystemandtherealeconomy

Theyintermediate betweenallsectorsoftheeconomyandothernancialintermediaries

and institutions, and some of them provide the payments system, which most of us use

every day.

Banks are unique in that their liabilities, bank notes and coins. Banks are able to create

additional money when required by individuals, businesses and government (with

the assistance of the central bank). This unique feature, plus their balance sheet

structure, places banks in a unique position in another way: they are inherently

unstable, and therefore require robust regulation and supervision.

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2 Mishkin Fs & Eakins SG (2000) “ Financial markets & Institutions”, Reading, Massachusetts: Addison

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