An Overview of Banking

Paul Newson

This article was first published as a chapter in Interest Rate Risk in the Banking Book, by Risk Books.

The objective of this book is to describe the impact on banks of changes to the general level interest rates and, to a lesser extent, changes to other market prices. However, before we consider such important matters in detail, it is worth stepping back to examine exactly what a bank is and what it does – this first chapter therefore offers a brief overview of the business of banking.

There is no precise or watertight definition of a bank or of banking, but the term “bank” usually describes an organisation that undertakes certain specific financial activities or functions, perhaps the most fundamental being that of acting as an intermediary between those who wish to borrow money and those who wish to lend it. The chapter will therefore begin with an outline of the main functions that banks perform in an economy, and the major financial products they offer to their customers. Not all banks will necessarily perform every function described, and some banks may well offer other services and products (such as insurance) that are not generally termed banking, but this should not