How Does a Bank Work: Main Principles

So, what are the banks? They represent financial intermediaries who are engaged in the redistribution of capital between suppliers of goods or services and their consumers. Deposits are one of the most important areas of activity of any bank.  In the conditions of a developed market system, a commercial bank becomes the predominant form of banking intermediation, and its activity is based on several principles that are enshrined in banking legislation. 

4 Basic Principles You Need to Know

The main principles include:

  1. The work of the bank within the resources existing at the real moment;
  2. The economic independence of the bank;
  3. Relations in the form of the client - the bank are built on the type of ordinary market relations;
  4. Indirect economic methods are used in the regulation of the bank.

Let's proceed to a more detailed consideration of the above principles.

  • The 1st principle is the most important, since on the basis of this principle, the bank must ensure numerical correspondence between the resources at its disposal and other assets, as well as be able to achieve a certain ratio of bank assets to the specificity of the resources mobilized by it.
  • The 2d principle is that the bank has economic autonomy, which lies in the economic responsibility of the bank, that is, in its free disposal of attracted resources and its own funds, in the free choice of customers, and also in the free disposal of the bank's income.
  • In connection with the 3d principle, the bank provides loans based on market criteria such as: profitability, liquidity, and risk. Therefore, a focus on state interests of a general scale are considered incompatible with the bank’s commercial activities, since this circumstance will inevitably turn into a crisis of solvency and liquidity for it. A separate item is mortgage lending, which is rapidly developing in the regions, in large cities.
  • Based on the 4th principle, the state participates in the regulation of the bank’s activities, applying exclusively not direct orders, but only indirect economic methods.

Consequently, on the basis of these principles, the main purpose of the bank's work of commercial banks is to assume the risk share that will not prevent the bank from being liable for its obligations. Therefore, work related to risk management is the main one and, moreover, represents a significant problem for the bank.