Which Banking Sector Impacts Our Economy?

Dec 15, 2023 By Triston Martin

Some people may define it more widely than this which also includes subsectors concentrating on asset management, insurance, venture capital, and private equity. According to the information provided by the Commerce Department, as of the end of 2018, the banking system in the United States had a total of $17.9 trillion in assets and had generated a net income of $236.8 billion. The banking sector's primary contributions to the economy are processing deposits and providing loans.

The Process of Banking Exposed

The storage of financial assets is at the heart of all banking and is where the banking industry started in ancient times; nevertheless, it has come a long way from when it was used to store gold coins for affluent clients. A bank's most fundamental function is to accept money deposits from customers, whether those customers are people or organizations, with the proviso that the money may be taken whenever the depositor desires (though sometimes with a penalty for early withdrawal). The bank could also give the depositor interest on their money, although this depends on the sort of account they have.

After that, the bank will lend the money it has on deposit to other people and companies, and in exchange, it will collect interest payments from those who borrow the money. The lower interest rate that banks pay depositors for the use of their money and the higher interest rate that banks charge borrowers for borrowing money allows banks to profit from the spread between the two rates.

Banks are prohibited by law from lending out all the money currently in their possession. Instead, they are obliged by regulators to hold a specific amount of capital in reserve to meet the requirements of withdrawals and other purposes. The standards shift from time to time and vary according to the size of the bank, but recently it has been mandatory for many of the largest banks in the United States to retain 8% of their total capital in reserve.

Financial Institutions Influence the Economy

The financial industry is essential to the functioning of the contemporary economy. As the principal provider of credit, it makes it possible for individuals to purchase things like automobiles and houses and for companies to purchase equipment, grow their operations, and fulfill their payroll obligations. Depositors also have the opportunity to earn some interest on their money while keeping it in a secure location (especially after the creation of the Federal Deposit Insurance Corp. (FDIC), which protects many accounts up to specific limitations) when they store it in a bank. Banks give this opportunity. The credit cards, debit cards, and checking accounts that banks make accessible to customers make it easier to carry out a wide variety of daily transactions. In online commerce, where a currency is mostly obsolete, they also assist in fuel growth.

Unfavorable Effects on the Economy

On the other hand, there is the possibility that the banking industry may bring about enormously unfavorable effects on the economy. For instance, irresponsible lending practices on the part of several financial institutions contributed to the subprime mortgage market's collapse in 2007, which in turn set off the Great Recession that lasted from 2007 through 2009. The regulatory changes that have been made since then May one day assist prevent another catastrophe like the one that occurred back then.

Financial Institutions Are Monitored and Controlled

Because of the important function that banks play in the economy, governments all over the globe have enacted rules that are intended to deter banks from participating in activities that involve an excessive amount of risk. In the United States, for instance, the many types of financial institutions, including banks, are subject to oversight and regulation from various federal and state organizations.

Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation (FDIC), the Federal Reserve System, and the Office of the Comptroller of the Currency are all examples of federal regulatory agencies. The National Credit Union Administration administers regulations for credit unions, which may also be categorized as a subset of the banking industry. State banking regulators and supervisors oversee and regulate state-chartered financial institutions. Certain banks are subject to regulations at both the state and the federal levels.

Major Corporations Operating Within the Banking Industry

There is a wide range of sizes for banks, from the neighborhood bank in a small town to the international behemoths. JPMorgan Chase, Bank of America, Wells Fargo, Citibank, and US Bank are now the top five financial institutions in terms of size in the United States. All of them, except the final one, have assets worth more than a trillion dollars.

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