Banking

Definition: Banking is one of the key drivers of the U.S. economy. Banking provides a safe place to save excess cash, known as deposits. It also supplies liquidity to the economy by loaning this money out to help businesses grow and to allow consumers to purchase homes, cars and consumer products. Banks primarily make money by charging higher interest rates on their loans than they pay for deposits.

The Federal Reserve is the nation's central bank. As such, it creates the supply of money by lending it to the banking system, requiring the level of reserves banks must keep on hand, and by regulating the prime interest rate banks charge.

There are several types of banks. Commercial banks are the most common, and include global banks such as Bank of America and Citigroup. Community banks are smaller and focus on local service. Online banks operate over the Internet.

Savings and loans target mortgages. Credit unions are usually restricted to employees of companies or schools. Shariah banking was developed to conform to the Islamic prohibition against interest rates.

In recent years, banking has become very complicated as banks have ventured into sophisticated investment and insurance products. This level of sophistication led to the banking credit crisis of 2008.

Also Known As: financial