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What does a bank do?

Bankgebäude
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What does a bank do?
Money may not always be visible in our daily lives, but it is never far off: at the supermarket checkout, when paying the rent ... Money is being saved, invested and spent. Banks are important hubs in the circulation of money.

Lot size transformation

Banks allow people to save money and receive interest on their savings. Banks use their customers’ savings to extend credit to other customers. For example, companies can obtain loans to fund their projects. Borrowers have to pay the bank interest on their loans. By acting as key intermediaries between savers and borrowers, banks promote economic activity and growth. Lot size transformation – bundling many small-sized savings to fund bigger loans – is one of a bank’s core business activities.

Maturity transformation

As money is continuously being withdrawn from savings deposits, banks have to keep a part of the sum. They can use this as funding for long-term loans. The result is maturity transformation: short-term savings are transformed into long-term credit. Savers can thus withdraw money at any time even though the capital is tied up in loans, often for many years.

Risk transformation

Risk transformation is another feature of the traditional banking business. Giving loans to companies always carries a certain risk. The bank’s task is to ensure that savers remain unaffected by the risk of credit defaults.

Transaction banking

Another core business field is transaction banking, i.e. the processing and settlement of payments. Customers request credit transfers at the branch office or online, they cash cheques, they pay money into their accounts or withdraw it. Banks charge fees for handling all these processes.

FAQ

Banks manage money, grant loans, enable savings and carry out payment transactions – they are central intermediaries in the economic system.
Many small savings deposits are pooled to finance larger loans – e.g. for companies or real estate projects.
Banks convert short-term deposits (e.g. your savings) into long-term loans. Nevertheless, you can withdraw money at any time.
Through risk transformation: It distributes the risk of loan defaults in such a way that savers are not directly affected.
Transfers, deposits and withdrawals, check cashing, internet banking – banks usually charge fees for all these services.

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