What is a bank?
A bank is an organisation providing financial services. Banks can be classified in different ways and types. An important distinction to make is the difference between commercial and central banks. Commercial banks are private companies with a goal to make profit, whereas central banks are semi-independent institutions aiming at maintaining stability of the financial system.
Types of banks
Commercial banks can distinguish themselves from each other by the type of customer or/and service they serve. Some examples:
- A retail bank is targeted at delivering financial services directly to individuals or small businesses; conducting payments, managing savings, lending money to private persons and businesses, providing mortgages etc.
- A private bank supplies financial services to rich individuals: people with much more money in the bank than they borrow. These banks manage the credits of these wealthy customers, look for adequate investment opportunities, etc.
- An investment bank serves businesses, governments and very wealthy individuals. In a wider sense they try to invest as cleverly as possible in different types of commercial activities to make more money with money. This can be done by investing in common financial products like shares or government bonds, but also more complex financial products like options and insurances. The ‘products’ they create mostly have a robust entry-level fee. They also help customers with investing in businesses and manage all financial aspects of company mergers and acquisitions etc.
Many big commercial banks combine multiple types as different business units within their organisation.
The central bank is an independent body aiming at keeping the financial system stable. The bank executes this by managing the amount of money and by verifying that individual banks don’t undermine the confidence in the system. On top of that a central bank is trusted with distributing currency: it has the monopoly on printing new bank notes and minting new coins in the official (legally registered) currency. Nowadays this last task is secondary because the tangible coins and notes are only a fraction of the total amount of money. Most of our money only exists in numbers on computer screens.