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As money facilitated economic exchange, financial institutions – especially banks – are there to help other economic entities (so‑called non‑financial entities, i.e. households, enterprises, but also the state government) in their functioning.

Why were the banking institutions established? Because non‑financial entities started to accumulateto accumulateaccumulate more money than they could spend (this surplussurplussurplus is savings) and some of them began to report the need for additional funds (hence the emergence of loans and credits). If there were no banks, a person who wanted to finance, for example, a building of a house, would have to look for another person who would grant her a loanto grant (a loan)grant her a loan. Of course, it would not be easy to find someone who would have money available to loan at the same time (often a considerableconsiderableconsiderable amount) and would be willing to risk the borrower not paying back the entireentireentire loan. At the same time, a person wishing to invest their savings would be doomeddoomeddoomed to look for someone who would like to trade these funds and give them back after the agreed period, of course along with profit. However, she would not be sure that she would find a willing person and, more importantly, that she would be able to trust someone and entrustto entrustentrust her with the money. Thanks to banks, we do not have such problems. This is what the special role of banks in the economy is based on.

What is a bank?

A bank is a financial intermediaryintermediaryintermediary institution, an enterprise providing services to non‑financial entities. All banks operating in the economy create a banking system. The banking system mainly consists of:

• central banks – representing the national public interest or the interest of a monetary community,

• commercial deposit and credit banks – banking companies that maximize profits.

The banking system also consists of all legal norms determining the organization, scope and principles of operation of banks. The institutions that superviseto supervisesupervise its functioning play an important role in this system. It should be emphasizedto emphasizeemphasized that organizational forms and the structure of banking systems are not identical in all countries.

The name „bank” is derivedto be derivedderived from the Italian “banco”, meaning “the bench”, a countercountercounter at which Italian traders who transferred gold coins from one client to another. The certificates issued by them (so‑called depository receiptsreceiptreceipts) began to function as money (modern banknotes) as well as coins. When the settlement took too long, the impatientimpatientimpatient customers would break the bankers' benches, causing loss to their business. Often this led to bankruptcy (“bancarotta” from: banco – bench, rotto – broken).

Central banks are the main element of the monetary power of a state or a monetary union. In the structure of power, the central bank is responsible for the money supply (i.e. the amount of money on the market) and conducts monetary policy.

The central bank should be independent of the government in terms of its policy. The most important goal is to ensure price stability. Nowadays, central banks, by price stability, consider inflation so low that it does not have a negative impact on decisions made by participants in economic life, including those regarding investment and saving. Ensuring price stability is the basic way in which the central bank contributesto contributecontributes to achieving high and sustainablesustainablesustainable economic growth.

Banks are just as important as money in the economy – they improve its functioning. The most visible effect of the lack of banks and the banking system would be the functioning of the money flow in the economy almost exclusively in the form of cash. We would have to keep the money for current expenses and any savings in their physical form, bearing the risk of losing them as a result of damage, loss or theft. In the era of online transactions and non‑cash settlements, it is difficult to imagine an economy without these institutions.

Keywords

bank, loan, credit, deposit, central/commercial bank, banking system, price stability, inflation

Glossary