What's a bank?

[ThomWV]

I just caught the tail end of an episode of Book TV on Cspan and the author was talking about the need for regulation to constrain our banks. As the fellow spoke I reflected on just what it was that I thought constituted a bank. And I thought about it and I thought about it and for the life of me I can not tell you just what a bank is today. The old notion that they are institutions that take in deposits that they mix with their own capital to make loans. Interest from the loans, it is immagined, then pay the cost of operation of the institution, some reasonable rate of interest on the lent deposits, and income on the owner's capital. That of course is a story-book version of what a bank is and does, but if not that, then what? They make loans, but they have little to no deposits, they act as clearing houses for all those minor transactions we, the great unwashed, make from day to day, and what, they play the stock market? They create and deal in unfathomable financial instruments, they conger evil and do magic for all I know, but it just stuns me to realize I do not understand anything about their business model. I do not know what a bank really is, I do not understand how it does its business, I do not understand where all the billions and trillions of dollars that seem to make up our disaster of a banking system come from or how it ends up in the hands of these institutions.

Can someone help me. Explain it all, make it simple, but please, make it factual, because I'm really stumped here. What are these damnable things we have allowed to come to life and how is it that they hold us hostage?

[BlooInBloo]

1. Anything that borrows short and lends long, basically. There are 2 main kinds...

depository institutions (your local neighborhood bank that we all know and love), and non-depository institutions (investment banks, basically).

[Justitia]

2. It depends on what kind of charter the institution has.

I hate to get too far into the weeds, but the technical definition of any of these institutions really depends on the type of charter it has.

Most institutions that we traditionally think of as "banks" are chartered as Federal Savings Banks.

They can be both privately or publicly owned. They are subject to various regulatory agencies dependent on their type of charter.

Just to confuse you even more, they are defined (via charter) by the state they charter in, so definitions can vary state to state.

I think your author is referring most generally to our large, multi-state banks which would actually have multiple charters (Citibank, Wachovia, Chase, etc).

Sorry, that is probably no help!

[sandnsea]

3. I had the same thought an hour ago

When the FDIC person said removing derivatives from banks could mean putting them beyond the reach of regulation, my immediate thought was wondering why a bank would need to deal in derivatives at all. And then thought about what banks do, and decided I don't know the business model of local commercial banks anymore. They also issue credit cards, cds, money markets; and more recently have been allowed to sell insurance annuities and other investment products. What all can a local bank do? That's a really good question.

[krispos42]

4. A hole in the ground surrounded by bricks where money goes to die n/t

[metapunditedgy]

5. Someone who has the license to print "money."

When you deposit your money and a bank lends it out again, it appears like the amount of money has doubled. But the actual value of that money stays the same. Banks control the virtualization of value, which we call money.

[jtuck004]

6. So, it's tough to define, but you know it when you see it? n.t