A bank is a financial institution that accepts
deposits from the public and creates a
demand deposit
Demand deposits or checkbook money are funds held in demand accounts in commercial banks. These account balances are usually considered money and form the greater part of the narrowly defined money supply of a country. Simply put, these are depo ...
while simultaneously making
loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...
s. Lending activities can be directly performed by the bank or indirectly through
capital market
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...
s.
Because banks play an important role in financial stability and the
economy
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...
of a country, most jurisdictions exercise a
high degree of regulation over banks. Most countries have institutionalized a system known as
fractional reserve banking
Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, ...
, under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure
liquidity, banks are generally subject to
minimum capital requirement
A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ad ...
s based on an international set of capital standards, the
Basel Accords
The Basel Accords refer to the banking supervision accords (recommendat