Banks : Fundamental Concepts

This chapter from our forthcoming book on financial institution regulation identifies the fundamental economic form of a commercial banking firm. We argue that a commercial bank is a financial intermediary that operates as a payments specialist. The intermediation and payment functions are not necessarily linked; many firms operate as financial intermediaries without offering payments services, and many firms and institutions offer payments services without being intermediaries. The linkage of the payment and intermediation functions in the commercial bank is due to the fact that a bank performs the payment function by means of accounts customers place on deposit. Given that the bank has funds on deposit to carry out its payments function, it naturally invests those funds in financial claims and thus becomes an intermediary. What is truly fundamental about banks is not the fact that they are financial intermediaries, but rather that they are payments specialists. The chapter discusses this feature of banks and places bank payment services in a broader context of other payment mechanisms including exotic instruments such as local currencies, MMORPG currencies, LETS systems, and crypto-currencies such as Bitcoin