Banking is an important institution in the economy and plays a very important role in the economic life and economic growth of any society. While it is of common understanding that banking is not “The Economy”, it is agreed that the health of the country’s economy is closely related to the soundness of its banking system which can be sustained through strict regulations and supervision in order to monitor and control business risks such as Capital Risks, Liquidity Risks, Credit Risks, Exchange Risks, Operational Risks, Market Risks and Legal Risks.
Bank regulations and bank supervision are required to facilitate a ‘Systematic Risk Reduction’ approach thus reducing the risk of adverse trading conditions and to ensure that Financial Institutions satisfy at least the minimum ‘Prudential’ requirements in order to reduce the risk factor that creditors are exposed to. Lack in regulations and slack in supervision may lead to Financial Institutions risking bankruptcy thus exposing their clients of potentially losing their investments and financial assets while distressing the country’s economy.
What is the actual function of a bank within an economy?
Banks' traditional role is primarily that of an intermediary for money, i.e. granting loans, processing payments, accepting deposits, carrying out investments, etc...
Although banks do not create new wealth, through borrowing, lending and related activities they facilitate the process of production, distribution, exchange and consumption of wealth. In this way banks become very effective partners in the process of economic development. (BlurtIt.com, 2007)
Banks act as the backbone of the economy. Instead of keeping peoples’ savings idle, banks inject this working capital in the economy; as long as capital is kept flowing in the economy, both the banks and the economy will remain sound and healthy.
The function of an efficient Financial Sector in the Economy
The function of an efficient...