Bank

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What Is a Bank? Definition and Role in the Economy

A bank is a licensed financial institution that accepts deposits, safeguards money, and extends credit. Banks facilitate payments, provide savings and investment products (like IRAs and certificates of deposit), and finance consumer and business activity through loans. They serve as intermediaries that move funds from savers to borrowers, supporting economic activity.

Key takeaways

  • Banks accept deposits and make loans, earning profit from the interest-rate spread.
  • Common products include checking and savings accounts, CDs, mortgages, credit cards, and business lending.
  • Banks are regulated at the state and federal level; many deposits are insured by the FDIC up to $250,000 per depositor, per insured bank, per ownership category.
  • Credit unions are member-owned, not-for-profit alternatives that often offer lower fees and higher deposit rates.
  • Choose a bank based on fees, convenience (branches/ATMs or online access), services offered, and customer service.

How banks evolved and why they matter

Banking has existed in various forms for centuries. The core model—taking deposits and lending them out—remains the same, but product offerings and delivery channels have expanded. Banks keep money flowing through the economy by financing purchases, investments, and business operations. Their stability and credibility are essential for consumer confidence and overall economic health.

Core banking services and products

  • Checking accounts: For day-to-day payments and withdrawals; usually low or no interest and may carry fees.
  • Savings accounts: Earn interest; suitable for short- to medium-term savings.
  • Certificates of Deposit (CDs): Time deposits with higher rates in exchange for locking funds for a set term.
  • Loans and credit: Mortgages, auto loans, personal loans, business loans, and credit cards—banks earn interest income from lending.
  • Additional services: Wealth management, private banking, currency exchange, safe deposit boxes, and business cash-management services.

Brick-and-mortar vs. online banks

  • Traditional banks: Offer in-person branch services and ATM networks—convenient for cash transactions and in-person support.
  • Online-only banks: Often provide higher deposit rates and lower fees due to lower overhead; lack physical branches but typically have robust digital tools.
  • Choice depends on preference for branch access versus cost and digital convenience.

Regulation and safety: how your money is protected

  • FDIC insurance: Protects depositors at FDIC-insured banks up to $250,000 per depositor, per insured bank, per ownership category.
  • Regulators: State-chartered banks are overseen by state agencies; national banks are regulated by the Office of the Comptroller of the Currency (OCC); the FDIC also supervises many banks.
  • Post-2008 reforms: The Dodd-Frank Act introduced stricter oversight for large banks, including annual stress tests to assess capital adequacy under adverse conditions.
  • These measures aim to reduce systemic risk and maintain confidence in the financial system.

Types of banks

  • Retail banks: Serve individual consumers with checking, savings, mortgages, and consumer credit.
  • Commercial (corporate) banks: Focus on business clients, offering lending, cash management, trade finance, and commercial real estate services.
  • Investment banks: Provide underwriting, advisory services (M&A), and capital markets activities for corporations and institutions.
  • Central banks: Do not serve the public directly; they manage monetary policy, stabilize currency, and set reserve and capital standards (e.g., the U.S. Federal Reserve).

Banks vs. credit unions

  • Ownership: Banks are typically for-profit corporations owned by shareholders; credit unions are nonprofit cooperatives owned by their members.
  • Costs and rates: Credit unions often offer lower fees and higher deposit rates but may have fewer products and limited branch/ATM networks.
  • Membership: Credit unions serve people who share a common bond (employer, community, profession).

Deposit and brokerage protections

  • FDIC: Covers deposit accounts (checking, savings, CDs) up to $250,000 per depositor, per insured bank, per ownership category.
  • SIPC: Protects customers of registered brokerage firms if the firm fails—covers up to $500,000 in securities, including a $250,000 limit for cash held at the brokerage. SIPC addresses brokerage failure, not market losses.

How to choose a bank

Consider the following when selecting a bank:
* Account fees and minimums (maintenance fees, overdraft fees, wire fees)
* Interest rates on savings and CDs
* Loan rates and credit products
* Convenience: branch locations, ATM access, and mobile banking quality
* Customer service and reputation
* Specialized services: business banking, wealth management, private banking
* Insurance and regulatory status (FDIC-insured bank, NCUA-insured credit union)

Bottom line

Banks store money, provide payment services, and supply credit that keeps the economy functioning. Understanding the types of banks, the services they offer, how they are regulated, and the protections available for deposits will help you choose the right institution for your personal or business financial needs.