FT Guide to Banking

7

How a bank operates

The aim of this chapter and the next is to show how core banking works. There are a few basic things bankers have to get right. First, they must avoid lending out via long-term loans a very high proportion of the money they attract without regard for the potential for depositors and other creditors to suddenly demand their money back instantly. That is, banks must retain reserves of cash (and other liquid assets) to satisfy creditors as the need arises. On the other hand, holding too much cash leads to the loss of opportunities to lend that money (acquire assets) to earn interest. This liquidity management involves a delicate balance.

Second, banks must protect themselves against the possibility of their assets falling ...