What Is a Bank?
A bank takes deposits, makes loans and moves payments.
Free lesson
Video coming soon. The lesson video will appear here once it is published on YouTube.
In this lesson you learn to
- Describe the core jobs of a bank: deposits, loans and payments
- Explain how a bank earns money from the gap between interest rates
- Explain what a bank run is and why deposit insurance exists
Check yourself
Think about each question, pick what you would answer if you like, then select “Show answer” to see the solution and why. Nothing is graded or sent to us. Example numbers are worked examples, not predictions.
1.Which three jobs make up the core of what a bank does?
A bank takes deposits, makes loans and moves payments.
2.True or false: when you deposit money, you are lending it to the bank.
A deposit is a loan to the bank, and interest is the price of that loan.
3.What is interest, in the words of the episode?
Interest is the price of borrowing money.
4.Worked example with made-up rates: a bank pays 20 a year on a deposit of 1,000 and collects 60 a year on a loan of 1,000. What is left for the bank each year before costs?
Interest collected (60) minus interest paid (20) leaves a gap of 40 a year, before costs.
5.In the same made-up example the gap stays at 40 a year. How large is the gap over ten years, before any costs?
10 years times 40 a year is 400, with unchanged example rates and before any costs.
6.True or false: the gap between the two rates is pure profit for the bank.
The gap is the bank's income from lending; costs and losses come out of it first.
7.True or false: a bank keeps all customer deposits as cash in its vault.
Most deposits are lent on. The bank keeps only part at hand, enough for the few people who withdraw on a given day.
8.What is a bank run?
A bank run starts when too many people want their money at the same moment, more than the bank keeps at hand.
9.According to the Bank of England (2014), what happens when a bank makes a loan?
When a bank makes a loan, it creates new money as a deposit (Bank of England, 2014).
10.Which statements fit the episode? Select all that apply.
Several answers can be correct.
Banks create money as deposits when they lend, but the power is steered by the central bank, mainly through interest rates.
11.In the US, deposits are insured up to which amount per depositor, per insured bank (and per account ownership category), as of 1 April 2024?
The FDIC insures deposits up to 250,000 dollars per depositor, per insured bank, per ownership category (status 1 April 2024). Other countries have their own rules.
12.In which year is the earliest surviving Bank of England note dated?
The oldest surviving Bank of England note is from 1697, and it is still a receipt, like the goldsmiths' receipts before it.
Sources (4)
- Bank of England Quarterly Bulletin 2014 Q1: Michael McLeay, Amar Radia, Ryland Thomas, "Money creation in the modern economy" (14.3.2014)
- FDIC: Understanding Deposit Insurance (zuletzt aktualisiert 1.4.2024)
- Bank of England Museum, Online-Sammlung: "Our earliest Bank of England note"
- Eigene Berechnung (synthetische Zinssaetze)
Related lessons
Education only. Not financial advice.