Banks are closely concerned with the flow of money into and out of the economy. They often co-operate with governments in efforts to stabilize economies and to prevent inflation. They are specialists in the business of providing capital, and in allocating funds on credit. Banks originated as places to which people took their valuables for safe-keeping, but today the great banks of the world have many functions in addition to acting as guardians of valuable private possessions.
One of the most important of these is regular participation in the foreign exchange market. In this market, banks buy and sell foreign currencies on a continual basis, so that an importer can purchase a shipment of goods from another country and pay for it in the currency of that country. The bank"s selling price for a particular currency is always slightly higher than its buying price for the same currency, and the difference represents the bank"s profit on the transaction.
Banks also provide a service for exporters. When an exporter arranges a shipment of goods to another country, he may need to finance the operation until he receives payment from the importer. Banks can provide loans to exporters at relatively low rates of interest, and they can also provide insurance against the risk of non - payment by the importer.
In addition to these international functions, banks also play an important role in the domestic economy. They are a major source of loans for businesses and individuals, and they help to allocate capital within the economy. They also play a role in the regulation of the money supply, through their ability to create and destroy money in the form of deposits and loans.
Finally, banks are important because they provide a convenient means of payment. People can use bank cheques, credit cards, or debit cards to pay for goods and services, and this makes economic transactions much easier and more efficient.