The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors, 2nd Edition

Chapter 3

The Business of Banking

Banks are still preeminent in the financial system . . . [and] are vital to economic activity, because they reallocate money, or credit, from savers, who have a temporary surplus of it, to borrowers, who can make better use of it . . . [and by] collaborating to clear payments, they help individuals and firms fulfill transactions.

—The Economist1

Banking is a business like any other—a raw material (in this case money) goes into the process we call banking, and hopefully, a profit . . . comes out . . . the other end.

—Howard Palmer2

A bank is a place that will lend you money if you can prove that you don’t need it.

—Bob Hope, comedian and actor (1903–2003)3

Banking, at its core, is a simple business. Banks transform the savings of many individual depositors into credit finance. One of several types of financial intermediaries—a category that also includes insurance companies, securities underwriters and brokers, and investment managers, a bank, as do these institutions,4 functions as a conduit between those with funds to deposit or invest and those in need of funds. Classically, in banking, intermediation occurs when a bank accepts deposits from those with surplus funds (depositors) and lends the same funds to entities in need of funds (borrowers).5 That is, traditionally, banks borrow money from depositors to lend to those who borrow money from it. Although banks perform other functions besides taking deposits and advancing loans, this core intermediation ...