|Basic Business of Banking|
For a newcomer to banking, everything seems backward. What you as an individual consider an asset - your deposits at banks - are liabilities or money owed to depositors. What you consider to be a liability - loans you have at banks - are an asset or money owed to banks.Banks are financial intermediaries, meaning they bring together sources/owners of funds and users/borrowers of funds. The visual here shows the intermediation process at work.
The intermediation process provided by banks is valuable to our financial system. It provides an efficient way to make funds available to those that need them. Without banks, individuals with funds to lend (depositors) have to search out borrowers. Once they find borrowers, they must have the necessary skills to evaluate the risk of not being repaid. Borrowers on the other hand have to search out lenders of funds and find their best deal (most generous loan terms). This can be expensive to lenders and borrowers. Banks, by focusing on raising deposits and making loans, become experts in both, achieving economy of operation. This reduces the cost of bringing lenders (depositors who put their funds in banks) and borrowers (bank loan customers) together. Ultimately, these cost savings translate into higher returns for lenders and lower funding costs for borrowers.