课程: Financial Basics Everyone Should Know

Understanding how banks operate

课程: Financial Basics Everyone Should Know

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Understanding how banks operate

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- [Instructor] Understanding how banks work and why they matter to the overall economy is critical. When you understand the role that banks play in your own finances, you'll be better prepared for the future. The basic function of a bank is to accept money from savers opening up savings and checking accounts with the bank, and then loan that money out at a higher rate to borrowers for houses, cars, businesses, et cetera. It's pretty straightforward, right? Well, banking is more complicated than that, primarily because of two factors. First, savers have the right to withdraw their money from the bank at any time, but banks still need to have plenty of money on hand. There's an old story about a man going into the bank during the Great Depression and asking for his money from the bank because he thought that the bank was on the verge of collapse. When the bank teller proceeded to bring him his cash, the man looked at it for a minute and said, "Oh, no, you can keep it." The teller looked confused and asked the man what was going on. The man replied that, "If the bank had his money safe, they should hold onto it, but if they did not have it, then he wanted it all back right now!" The point is, that the bank, when it's successful, has the confidence to the general public. If the public believes the bank is on the verge of failing, everyone runs to the bank to withdraw their money, which leads to its collapse. It's a self-fulfilling prophecy. To prevent such bank collapses, in modern America, banks are backed by the government. Banks in their modern form cannot exist without the government, which operates both as their biggest depositor and creditor and their protector of last resort if the public loses confidence in that bank. The second complicating factor for banks is they can't earn enough money to stay in business by just lending out the dollars given to them by savers. Instead, banks borrow money from the government based on the amount of cash savers have entrusted to them. The banks then take these funds from the government and lend them out to the public, alongside the money that's deposited by savers. While many people complain about the government's involvement with banks, the reality is that virtually all banks around the world are backed by their respective governments based on the same two factors we've talked about here. For better or for worse, that's simply how the modern banking system operates, both in the US and in most other developed countries.

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