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What do banks do?

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    What do banks do?

    High street banks are not that different from any other business.

    What sets them apart is that they work with money: looking after it, lending it, and helping you pay for things with it.

    what-do-banks-do

    This guide looks at each of these in turn…

    Banks look after your money

    Keeping small amounts of money in your pocket to pay for things makes sense.  But holding larger amounts is risky as there is a chance your money could get lost or stolen.

    Banks make sure your money is kept safe – and have served this role since ancient Greek and Roman times.

    Many banks today offer free safekeeping services, with no charge for using your current account.  In return, they are able to use the money stored with them to earn a profit, by lending it to other people.

    The Bank of England makes sure that banks operate in a safe and sound way so that your money is there when you need it. And should the worst happen and your bank fails, you could claim up to £85,000 of your money back through the Financial Services Compensation Scheme.

    Banks lend money

    Banks don’t just look after your money.  They also lend money to those who need it.

    Banks provide loans for many things, whether you’re a family looking to buy a house or a business seeking to expand, hire and grow.  In this way, the flow of lending can help the economy as a whole to thrive.

    Lending money is a risky business, though.  Banks can lose out if someone they have lent money to doesn’t pay it back.

    Banks know this and so they try to make sure they earn enough profit by charging more interest for lending money than they pay out in interest on people’s savings.  This guide explains why your mortgage rate will typically be higher than Bank Rate.

    Of course, some loans are riskier than others – and banks will charge higher interest rates to reflect this.

    But no-one can predict the future perfectly. Inevitably, banks sometimes get it wrong: sometimes a large number of loans will not be repaid.  So the Bank of England makes sure that banks hold sufficient financial resources in case they face larger losses than they expect.  That is part of ensuring banks operate in a safe and sound way.

    Banks help you pay for things

    Banks provide debit and credit cards so you can pay for things in the shops and online.

    Over 9 in 10 adults make payments using a debit card at least once a month.

    Source: UK Payments Markets 2016

    When you use a card to buy, say, food, the money is transferred from your bank account to the bank account of the shop. Exactly the same thing happens when you pay for things using your debit or credit card online.

    When you add to this the payments for much bigger items, like houses, and all the financial activity between banks and other financial situations, over £500 billion moves between bank accounts every single day.  That’s over £5 million every second.

    The stakes are very high:  if these payments stopped working, then the entire economy would grind to a halt.  This is why the Bank of England oversees these payments, to make sure they operate smoothly every day.

    What else do banks do?

    Looking after your money, lending money and helping you pay for things are the main ways that people use banks in their daily lives.

    Banks do other things too.  Most investment banks, for example, trade shares, foreign currencies and commodities (like oil or gold) in financial markets on behalf of their clients.

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    The original meaning of “bank” comes from the Old High German word meaning “bench”. Early bankers in Europe used benches as makeshift counters for banking transactions.

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    1 comment

    1. Mark newman
      31st May 2017

      “In return, they are able to use the money stored with them to earn a profit, by lending it to other people”

      This seams to be slightly at odds with what the BofE research department stated in a previous paper and also in this interview: https://youtu.be/CvRAqR2pAgw

      Although it sounds logical and intuitive many economists have pointed out that it isn’t entirely correct that banks lend out savings.

      Would be great if this could be clarified in simple terms.

      Thanks

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