Questions and Answers
What is the primary function of a bank?
Accepting deposits and making loans
What system do most countries institutionalize in banking?
Fractional-reserve banking
What are banks generally subject to in order to ensure financial stability?
Minimum capital requirements
Where did banking in its modern sense evolve?
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What role do banks play in the economy of a country?
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Study Notes
Banking Overview
- The primary function of a bank is to act as a financial intermediary, facilitating the flow of money between savers and borrowers.
Banking System
- Most countries institutionalize a fractional reserve banking system, which allows banks to lend a portion of deposits and maintain a fraction as reserves.
Regulation and Supervision
- Banks are generally subject to strict regulations and supervision to ensure financial stability, including capital requirements, liquidity requirements, and risk management guidelines.
Evolution of Banking
- Banking in its modern sense evolved in medieval Italy, specifically in the city-states of Florence, Venice, and Genoa.
Role of Banks in the Economy
- Banks play a crucial role in the economy by providing liquidity, facilitating transactions, and enabling investment and growth by channelling savings into productive activities.
- They also act as a conduit for monetary policy, implementing central bank decisions to control inflation, manage exchange rates, and stabilize the economy.
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