Banks are refer to lending institutions that intermediate (they compete for deposits to write loans) and subsequently, they hold two legal commitments across their balance sheets (equity, traded on the stock exchange and deposits) and hold exchange settlement accounts with Reserve Bank of Australia, the Australia’s central bank. ESAs streamline the settlement of interbank transactions. Bank that acquires the rival bank cheques are presented to the clearinghouse for redemption. After processing, the net balances are posted on ESAs. Bank that accumulate adverse balances observe a fall in the ESA and creditor bank observe an increase in ESA balances.
Banks do not only do business in retail banking market where they supply deposits and buy consumer and commercial loan. They pay competitive interest rate on liabilities and earn interest on assets. Besides, banks also involve in wholesale banking market by trading in money market. They buy corporate and government securities and issue their own type of security called certificates of deposits (CDs). Moreover, banks also provide other services and products such as insurance. They provide broader range of services can be explained by growing preference of one stop shopping and economies of scale.
Other the other hand, banks acts as financial intermediaries where they solve the problems that savers would face if they invest in corporate equities and securities such as liquidity cost, price risk and agency cost. For example, bank deposits from saver can be withdrawn on demand and full value of the deposits can be redeemed which overcome the liquidity risk and price risk that an investor would face if he invests in corporate sector.
Furthermore, banks also act as asset transformers when they perform liquidity transformation and maturity transformation. Agency cost can be alleviated when savers delegate the banks the...