What are the functions of the banking system?

The everyday life of modern man intersects with the functioning of the banking system more often than we consciously think about it. Whenever we make a card payment, withdraw cash from an ATM or spend funds from a loan, we use the services of the banking system. Therefore, it is worth knowing how the banking system works, thanks to which money can be traded - and more.

Banking system - basic functions

It seems that listing the basic functions of the banking system is very simple - it deals with money turnover in domestic and foreign transactions.

The banking system is primarily designed to create money, which is the ultimate means of payment in economic transactions. Not every bank is entitled to do so - only the central bank is capable of issuing money. In Poland, the central bank is the National Bank of Poland.

On the other hand, other banks can create working capital in the form of script money. It is not a real resource, but a means of payment created by means of an entry in a bank account, the so-called cashless money. We deal with scriptural money every day - people who pay deposits to the bank are still the owners of the cash, but in fact it is not idle on their accounts, but is released into circulation. It can be used to finance, for example, investments or loans from other citizens. Thus, commercial banks turn over amounts greater than what they actually have in cash, thanks to which the funds in circulation pay off much more than if they were left in the account.

The subsequent tasks of the banking system are based on the above function. It becomes an intermediary between the customers who have cash and the customers who need it. As indicated above, the former deposit their cash in the form of deposits, etc. This cash is then used by borrowers who can use it to finance their current needs or investments, paying off their liabilities in time.

Banking system - tasks of the central bank

As indicated, the central bank - i.e. the National Bank of Poland - is the only one with the right to issue real money. At the same time, the central bank has two additional functions - the bank of the banks and the bank of the state and the national economy.

Operating as a bank of banks means that the central bank regulates and controls the flow of money in the market. It is responsible for supporting other banks in maintaining the liquidity of the credit potential at an appropriately high level. The tools by which the central bank can influence the remaining units of the banking system are required reserves, refinancing loans and open market operations. Required reserves mean the level of the required cash reserves of commercial banks. Individual units cannot grant loans for the entire amount of cash they have - some of it will constitute a reserve. A refinancing loan is a loan granted by the central bank to commercial banks in dire straits. In contrast, open market operations are used to control the money supply in the market. If a central bank wants to reduce the amount of money, it starts selling public securities. If the amount of money is too low, the central bank buys the securities, thereby freeing up additional funds.

Banking activities performed within the banking system

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Since it is already known what functions banks and the banking system fulfill, it is also worth explaining what activities these institutions can perform. Interestingly, there are steps. which - apart from banks - are also authorized to perform by other entities.

At the beginning, however, let's focus on activities that are solely the responsibility of banks. First of all, banks are entitled to accept cash deposits and keep accounts - both those where these funds are kept and other types of them. The second activity, equally important for consumers, is the right to grant clients loans and bank guarantees. Moreover, only banks have the right to issue bank securities and to conduct bank money settlements.

The second group of activities includes activities that banks carry out, but do not have a monopoly in this respect. Various shadow banking institutions are also entitled to such activity. This group includes, for example, cash loans (it is worth remembering that they are not the same as loans). Further, banks and parabank institutions are entitled to carry out checks and bills of exchange, issue payment cards, store securities, items or keep safe-deposit boxes. There are also sureties (but not bank guarantees) here.

The banking system is the basis of the day-to-day functioning of the economy. Most people are unaware that they deal with it on a daily basis. Therefore, it is worth knowing what tasks are set for the central bank and commercial banks, and what can only be addressed to them, and what can be dealt with in another, related institution.

Based on "Finance" by E. Jarocka