The banking industry handles the flow of money, matching up creditors and borrowers. People deposit money in accounts like savings and checking, and they borrow funds to buy things like cars, houses or college educations. Banks profit from a combination of interest on the deposits they take and fees for specific services.
Most banks are for-profit private companies; the stakes of stockholders make up most of a bank’s capital, which is its ultimate buffer against losses. A bank typically pays some or all of its profits to shareholders in the form of dividends. Stockholders may also reinvest those dividends.
A bank earns money from customers through charges on credit and debit cards, transaction fees from retailers who accept the banks’ cards and, in some cases, insurance and financial counseling. Some banks specialize in certain products, such as mortgages and auto loans or investments in stocks and bonds.
Banks are essential to the economy, providing a safe place for people and businesses to store their money, extending loans to stimulate economic activity and facilitating a wide range of other financial transactions. However, they are also exposed to a variety of risks, including the risk that consumers will mismanage their financial resources and accumulate excessive debt; the threat of terrorist attacks on a bank’s physical assets; and the risk of systemic risk from the collapse of the financial markets. To mitigate these risks, banks maintain substantial reserves of cash and securities and seek to diversify the credit quality of their loans.