Role of banks in making the society stable

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When it comes to money and management of money, the sole thing that strikes us is a ‘bank’. How do banks actually help up and keep the economy and society stable?

• By attracting savings and granting credit, banks are the oil for the wheels that keep the economy turning. Keeping our economy going without banks is quite impossible.
• Without banks, we’d have to pay for everything with cash, which we’d have to save somewhere. And that’s very risky.
• Without banks as a go-between, savers and borrowers would have to find each other personally, and a single transaction between a saver and a borrower would be very costly: just think of the fees you’d have to pay a solicitor to draw up a contract.
• The saver would be assuming a big risk—if the borrower can’t repay, the savers would lose all their savings. A bank lends money to a lot of people and companies. If some are unable to repay their loans, the bank can absorb these losses and savers won’t be affected.
• Banks also help solve the issue that customers generally want ready access to the money they deposit, while many loans require long-term commitments, such as a 30-year mortgage for financing a house.
• So, banks borrow (i.e. hold customers’ deposits) short-term but lend long-term. By doing this they transform debts with short maturities (deposits) into credits with very long maturities, managing the risks associated and collecting the difference in the interest rate as profit. This is known as “term transformation” and is a vital part of banking.
• Managing and monitoring risks are at the heart of banking, and most banks have strict policies in place at various levels to handle both financial and non-financial risk, including social and environmental risk.
• But more generally speaking, banks make transactions possible that otherwise wouldn’t have been possible, or that only would’ve been possible with huge risks.
• Even though savers can generally withdraw their savings at any time, the total amount of money held by a bank doesn’t fluctuate much because they have many customers.