8. Banking

Banking is the transactions carried on by any person or firm engaged in providing financial services to consumers or businesses.

For these purposes there exist commercial banks, central banks, savings banks, trust companies, finance companies and merchant banks. Banking consists of safeguarding and transfer of funds, lending or facilitating loans, guaranteeing creditworthiness and exchange of money. In other words, banking is the acceptance, transfer, and creation of deposits. The depository institutions are central banks, commercial banks, savings and loan associations, building societies, and mutual savings banks.

Banks

Banks are organizations in most countries that carry out the business of banking, taking deposits and then using those deposits to make loans. In essence, a bank aims to make a profit by paying depositors a lower rate of interest than the rate the bank charges borrowers. In accounting terms, deposits are considered liabilities (because they have to be repaid), and loans are considered assets.

There are many different types of banks, and banking structure varies from one country to another. Banks can fall into the following categories.

Retail banks are often referred to as commercial banks. In addition to conventional banking services, such as the provision of chequing accounts, they deal in foreign exchange, issue credit cards, provide investment and tax advice, and sell financial products such as insurance. In the United Kingdom the biggest retail banks (by assets) are Barclays Bank, National Westminster Bank, Midland bank, Abbey National Bank and Lloyds Bank.

Merchant or investment banks act as intermediaries between investors and private or public concerns seeking medium to long-term funds, often acting as underwriters for an issue of shares. Increasingly they have played a fundamental role in advising on mergers and acquisitions, and on management bye-outs. In the United Kingdom, some of the longest established and best-known merchant banks still privately owned.

Building societies were set up in the United Kingdom to take deposits in order to provide long-term loans (mortgages) to homebuyers. They are owned by their members (those who have deposited money with or borrowed money from them).

Savings Banks were set up with the aim of attracting small savers. They resemble retail banks in the services they provide.

Credit unions are the equivalents of savings banks, and are run as a cooperative nonprofit-making organization. Credit unions are widespread in the United States. France's biggest bank, Credit Agricole, is essentially a federation of more than 3,000 credit unions.

Universal banks are those, such as Germany's Deutsche Bank, Dresdner Bank, and Commerzbank, which do everything that the above types of banks do.

9. Types of Economies

Economics is a science that analyzes what, how, and for whom society produces. The central economic problem is to reconcile the conflict between people's unlimited demands with society's ability to produce goods and services.

In industrial Western countries markets are to allocate resources. The market is the process by which production and consumption are coordinated through prices.

In a command economy, a central planning office makes decisions on what, how, and for whom to produce. Economy cannot rely entirely on command, but there was extensive planning in many Soviet bloc countries. A free market economy has no government intervention. Resources are allocated entirely through markets.

Modern economies in the West are mixed and rely mainly on the market but with a large dose of government intervention. The optimal level of government intervention remains a problem which is of interest to economists. The degree of government restrictions differs greatly between countries that have command economies and countries that have free market economies. In the former, resources are allocated by central government planning. In the latter, there is not any government regulation of the consumption, production, and exchange of goods. Between the two main types lies the mixed economy where market and government are both of importance.

A traditional economy is an original economic system in which traditions, customs, and beliefs shape the goods and the products the society creates. Countries that use this type of economic system are often rural and farm-based. A traditional economy is defined by bartering and trading.

A traditional economy is defined by three characteristics:

1. It is based on agriculture, fishing, hunting, gathering or some combination of the above.

2. It is guided by traditions.

3. It may use barter instead of money.