Commercial and Central Banking

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Commercial and Central Banking I. Introduction: Probably the most important industry to any economy is the commercial banking industry. Commercial banks act as financial intermediaries, taking in deposits from one group in society and making loans to another group in society. Most commercial banks are corporations and are therefore in business to make profits. However, because banks are so important to the economy, and because the element of public trust is so crucial to their well being, the banking industry is usually highly regulated by the government. Whenever the public loses confidence in the solvency of a bank, they will rush to the bank and attempt to withdraw their deposited money. We call this a "bank run". If there are widespread bank runs in the economy, there will be a severe recession, with many bankruptcies and rising unemployment. This is precisely what bank regulators want to avoid. Like all businesses, commercial banks have both assets and liabilities. The major liabilities of commercial banks are the various deposits which they offer to their customers. In Taiwan, these include checking deposits, savings deposits, passbook savings accounts, time deposits, and time saving deposits. Banks can also issue bonds (sometimes called financial bonds) and borrow funds, both of which act as liabilities to the banks. On the asset side of the ledger there are three principal items. These include the reserves of the banks, the securities which they hold, and the various loans which they make to borrowers. The difference between the assets and liabilities of a bank represents its net worth or owners equity. Commercial banks are important to the economy because they reduce the cost of transactions between savers and investors, and between consumers and producers. They also affect the amount of credit extended to borrowers. Finally, they provide

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