In the world of finance, the entities that are responsible for the movement of money, whether in cash, accounts or credit (or debit) cards, are called Banks. In technical language, banks are those financial entities, which capture financial resources in the form of a deposit, made by their clients, and at the same time, are dedicated to giving that money as loans to companies or individuals.

What services does a bank offer?

A Bank offers different services, for example a service to direct the payroll of the company, loans for specific expenses (personal loans), to acquire a home (mortgage loans) among others. It is usually called “Commercial Bank” to make a distinction with respect to the “Central Bank” of a country. In general, it is thought that this type of (commercial) bank has a lot of capital and uses it to give it as a loan, however the reality is different (as we will explain later).

How is a Commercial Bank created?

A commercial bank is created when a group of people express their interest in creating it and decide to contribute an initial capital (which would be money from the Central Bank). Once the partners meet, they go to the Central Bank to request authorization to be part of the system. The Central Bank proceeds to evaluate the request (upon presentation of the established requirements), to comply with these requirements, the Central Bank proceeds to accept them.

The initial capital that the partners collect will be the share capital of the new bank that will be created. The founders begin to receive shares like any company, the number of shares that corresponds to each partner, is in accordance with the amount of money that each has contributed within the initial capital. After all this, it is time to go to the Central Bank in search of money through the publicity that the bank performs to build trust and credibility (in addition to the benefits it will provide, if they are changed to the new bank). In this way, new clients are attracted and leave the other banks for this “new bank” that gives them more benefits, making the transfer of their money to the account of the new bank.

This type of transfer is made with money from the Central Bank and this obviously makes the initial capital increase significantly, that money contributed by the new clients, will go to checking or savings accounts (that is the money that customers see in their accounts when they check their balance). Until now, the money from the new bank is equal to the money from the Central Bank that the founding partners have contributed. This situation will soon change, as capital will increase, as the new bank begins to grant loans.

What happens when the Bank grants credits?

At the time the bank grants a loan, an obligation is generated to the person requesting the loan through a formal contract, which will be paid by parties or fees, including interest, previously established. The Central Bank, within its regulations to the banking system, requires commercial banks to have a “minimum of money” from the Central Bank in relation to the bank’s own money, this money has been a minimum percentage of the money contributed by depositors.

As we saw in our previous article, although the support rate varies in each country, we can say that on average, with a single dollar of “central bank money”, a commercial bank can lend up to 10 dollars to other people, businesses or companies , this additional money is called “commercial money.”

What do you think about this topic? What is your opinion about commercial banks?

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