Almost all economies have a modern banking system, such as the one the one that exists in Canada. Banking refers to the monetary and financial activies that exist between the financial institution, the population, and the government. Banks provide liquidity for businesses and families to invest in for the future. Banks will provide a secure place to save cash (deposits) and these deposits are then insured. Banks keep ten percent of a deposit on hand and lend the other ninety percent out. Banks make more money from charging higher interest rates on loans than what they pay for deposits.
A central bank is a government owned and operated institution that is the sole money-issuing authority and controls the banking system¹. In Canada, the central bank is the Bank of Canada, referred to as just the "Bank"¹. Financial intermediaries are institutions that are privately owned and serve the general public. These types of institutions are called intermediaries because they accept deposits from the savers and give loans to the investors. Commercial banks refer to the financial intermediaries who accept deposits and create deposit money.
A central bank serves four basic functions: it is a bankers for private banks, a bank for the government, the regulator of the nation’s money supply, and a regulator and supporter of financial markets. The central bank will take deposits from commercial banks, which will then be transferred to the account of another bank. This process between central banks and commercial banks provide commercial banks with what can be seen as a chequing account and a means of settling debts to other banks¹.
Banks are also private firms that work towards a profit. Any liabilities the bank has are its deposits that are owned to the depositors. The main assets of a bank are its securities, including government bonds, and the interest-earning loans made to individuals and businesses. A bank loan is a liability to the borrower but an asset to the bank¹. An economy cannot function without banking because banks control the money supply and regulate the economy.
1. Ragan, Chrisopher. Macroeconomics/Christopher T.S. Ragan, Richard G. Lipsey. – 13th Canadian ed.