Credit and banking system

The credit and banking system is a set of credit and financial institutions that perform specific functions for the accumulation and distribution of funds. The credit system of developed countries consists of central, commercial banks, specialized credit and financial institutions. A special place in it is occupied by the central bank. In the US, there are 12 banks that make up the Federal Reserve System (FRS).

Various models of central bank construction are known. In most countries, they are state institutions (Germany, France, the Republic of Belarus). In the USA, Switzerland, they are organized as joint-stock companies. The main task of central banks is to manage emission, credit and settlement activities. Their main functions are the development and implementation of monetary policy; the issue and withdrawal of money from circulation (central banks are endowed with the monopoly right to issue banknotes); the storage of gold and foreign exchange reserves of the country; the performance of credit and settlement operations for the government; the provision of various services to commercial banks and other credit and financial institutions (storage of required reserves, provision of loans, etc.).

The special position of central banks in the credit system is manifested in the fact that they do not set themselves the goal of maximizing profits and do not compete in the field of business with commercial banks. They generally do not serve the public and businesses. These functions are performed by commercial banks.

Commercial banks are the backbone of the credit system. Modern banks are organized, as a rule, in the form of a joint-stock enterprise. They perform the following functions: reception and storage of depositors’ deposits; withdrawal of funds from accounts and execution of transfers; placement of accumulated funds by issuing loans, buying securities, etc. Accordingly, the operations of banks are divided into three groups: passive (raising funds), active (placing funds) and intermediary (performing operations on behalf of customers).

Commercial banks can be both universal and specialized. Universal banks perform all banking operations (according to some estimates from 100 to 300 types) for their customers. Specialized banks either serve a certain industry, sphere of management, a group of customers, or perform a small number of operations. For example, investment banks specialize in accumulating money for long periods and providing long-term loans. Mortgage banks carry out credit operations to attract and place funds on a long-term basis secured by real estate.

Cooperative banks serve cooperatives by lending them mainly against property.

Specialized lending to financial institutions include savings institutions, insurance companies, pension funds, investment, leasing companies, etc. Savings institutions are represented by mutual savings banks, savings and loan associations and credit unions. Mutual savings banks attract small deposits for the term. The accumulated funds are mainly used to provide loans secured by residential buildings, purchase of government securities, municipal bonds. Savings and loan associations raise funds by opening savings accounts and use them to provide targeted loans secured by real estate, buying securities.

Credit unions are cooperatives organized by a group of individuals, trade unions, religious organizations, etc. Their capital is formed by selling a special kind of shares, on which interest is paid. The funds raised are used to provide short-term consumer and individual loans to its members.

The most important of the non-bank credit institutions are insurance companies. Their funds are formed at the expense of contributions for life and property insurance; Companies use them to buy corporate securities, government bonds, thereby providing long-term loans.

Pension funds accumulate funds intended for pension provision, which are deducted by entrepreneurs and employees. The excess accumulated funds over pension payments is invested in government bonds and shares of reliable companies. Investments of pension funds, as a rule, are long-term, because the money in them accumulates for decades.

Investment companies (funds) specialize in attracting free cash by issuing their own shares (more often – a small par value). The collected funds are used to buy securities of other companies, government bonds. The income received on them is distributed among the shareholders. Investors willingly buy the obligations of investment funds, since diversification (investing in securities of various companies) achieves a certain “risk dispersion”, i.e. reduces the risk of losing savings due to the bankruptcy of an individual firm; high profitability of investments is ensured. Investment companies are of closed and open type. The former usually issue a large fixed block of shares, which are purchased by investors and cannot be returned back. The peculiarity of open-type investment companies is that their shares can be returned at any time. The most common are companies of the second type.

Leasing companies are companies that provide technical means for long-term lease; This method of financing investments is similar to the loan provided for the purchase of equipment.

Thus, specialized credit and financial institutions operate in relatively narrow areas of the loan capital market, perform a small number of operations and, as it were, complement the activities of commercial banks.