A financial system is composed of different brokers, being them more known and featured, banks. Others are insurance companies, surety bonding institutions, leasing, brokerage and investment fund managers. As financial intermediaries, banks are essential for the existence and functioning of any financial system.
A bank is able to grant credit without that such financing is directly linked to a saver or specific group of savers or an investor or specific group of investors. This feature distinguishes banks from other types of financial intermediaries.
Financing granted by a bank constitutes the greater portion of its assets since fund companies or individuals is its primary function. Funding cannot exceed several times of resources in cash or likely to become effective immediately. These resources entrusted to the Bank by savers and investors. These resources constitute the bulk of liabilities by a bank.
The banking intermediation has two main faces: when credits are awarded and when resources are obtained. When banks granted loans charge an interest rate that is known as interest rate active. In turn, banks paid to those who have entrusted their resources known as passive interest rate interest rate.
This duality makes the banking intermediation involves various risks. These include credit risks and liquidity risks. The first derived from the possibility that those who received credit from the banks fail to comply with their obligation to pay them. The seconds are direct consequence that banks typically grant long-term credits, while most of the resources that are in sight. Therefore, if in a moment occurs in particular a retreat unexpectedly high resource bank can face a liquidity problem.
Financial institutions control the risks of credit and liquidity, assessing the capacity and willingness to pay of potential users of financing, creating reserves to deal with contingencies, constantly increasing the number of depositors, and combining the amounts and terms of loans to be granted with the availability of resources.
There are international agreements, such as for example the of Basel, laying down guidelines for the regulation, the integration of indicators of solvency, soundness and liquidity of banks and maximum levels of funding that may be granted. Many of the limits set by the regulation are set based on the capital invested by the shareholders of a particular bank. Moreover, central banks and other financial authorities establish regulations and adopt preventive measures to reduce the risks that could threaten the operation of the financial system. In addition, they monitor financial intermediaries to comply with the legal framework and issued regulation, and that it is working properly in the interests of the public. Finally, the authorities facilitate transparency through the register, transmission and dissemination of information related to financial transactions.
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