Essence of banking

AuthorKaltrina Shkodra
Vol. 4 No. 2
June, 2020
European Journal of Economics, Law and Social Sciences
IIPCCL Publishing, Graz-Austria
ISSN 2519-1284
Acces online at
Essence of banking
Kaltrina Shkodra
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
In direct nance borrowerspenders borrow funds directly from lenders in the nancial
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
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
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
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
Theyintermediate betweenallsectorsof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.
2 Mishkin Fs & Eakins SG (2000) “ Financial markets & Institutions”, Reading, Massachusetts: Addison

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