A bank is a financial business, or company, that accepts bank deposits and lends money to individuals, businesses, and other lenders.

Banking defined in this way is carried out by some other financial intermediaries that perform the functions of safeguarding deposits and making loans. Building Societies and Financing Houses are not normally referred to as banks and are not regarded as being part of the banking system.

The critical part of the distinction between banking and the banking system is that the banking system is the principal mechanism through which the money supply of a country is created and controlled.

The banking system is normally understood to include the commercial banks, the secondary banks, the central bank, the merchant banks (or accepting houses) and the Discount Houses.

In balance sheet terms a deposit is a claim on the bank – that is a liability – while the customer’s promise to repay it or the collateral security is an asset to the bank. In the absence of government control on lending the limitation on the bank’s ability to create deposits is their obligation, if they are to remain in business, to pay out current account deposits in cash on demand.

Since the bank’s customers meet most of their needs for money by writing checks on their deposits, the cash holdings the banks need are only a small fraction of their total deposits. This ratio between their deposit liabilities and cash holdings is called the cash ratio (sometimes referred to as the primary ratio).

The banking system is based on confidence in the system’s ability to meet its obligations. In the short run, no bank is able to meet all its obligations in cash, and if demands upon it exhausts their cash reserves the bank would be obligated to close its doors. Runs on banks have not occurred in a developed country since the United States bank failures in the 1930s.

Banking systems in the advanced countries, and especially in Britain, have now developed and concentrated to the point where bank failure, or the necessity to control new entrants to the banking system, no longer present any problems – so we thought until 2008 perhaps. We’ll see in 2009 and onward.

Many experts debate that the banks are insufficiently competitive. Banking in the G8 countries has also developed by acquisition or internal growth to include many other services, i.e. – credit cards.

The supply of money is a basic tool of economic policy, and the government exerts control over the creation of credit by the banking system through its finance Department(s0.

[Paraphrased Excerpt] [see sources]