Banking & Credit Institutions

Its role in the system

The central hub most of an economy's money passes through. Banks gather the temporarily idle funds of households and companies, turn them into loans, and process the majority of payments. It is through banks that a central bank's rate decision reaches every borrower and every saver.

Functions

1. Taking deposits — current accounts, term deposits, safekeeping of client money.
2. Lending — corporate, retail and mortgage. Alongside them, in this same zone of the map, sit the non-bank lenders — leasing, factoring, credit unions, microfinance and peer-to-peer platforms — financing what a bank often will not touch: equipment on a lease, a supplier's receivables, a small fast loan.
3. Transformation — short deposits into long loans; small savings into large loans; the risk of one borrower spread across thousands of customers.
4. Money creation — when a bank grants a loan, it credits the money to the borrower's account; this is how most of the money in an economy comes into existence.
5. Payments and settlement — accounts, cards, transfers, currency exchange.
6. Investment banking (a distinct segment) — placing shares and bonds, mergers and acquisitions, trading on markets.

What makes it special

• How it earns, and the tension inside it: the interest margin — the gap between what it charges on loans and pays on deposits — plus fees. Hence the core difficulty of the business: a deposit can be withdrawn tomorrow, while a loan comes back in years.
• It runs mostly on other people's money: equity is a small fraction of assets. That is why banking is the most heavily regulated business there is: capital and liquidity ratios (Basel III), stress tests, and requirements on risk management.
• Deposit guarantee: in most countries the state guarantees retail deposits through a guarantee fund (🇪🇺 national schemes, up to one hundred thousand euros; 🇺🇸 the FDIC, up to two hundred and fifty thousand dollars), which is exactly why the supervisor watches that a bank does not gamble with depositors' money.
• Who regulates: the central bank or a separate supervisory authority (🇪🇺 the ECB for the largest euro area banks; 🇺🇸 the Fed, the FDIC and the OCC). The global rules come from the Basel Committee. 🇨🇳 In China banks and insurers have been supervised since 2023 by a separate National Financial Regulatory Administration (the NFRA, covering everything except securities markets), and the banks themselves are mostly state-owned: the “big four” — ICBC, China Construction Bank, Agricultural Bank of China and Bank of China — head the global ranking by capital, and alongside them, since 1994, sit three policy banks (China Development Bank, the Export-Import Bank and the Agricultural Development Bank) that take no deposits, raise money by issuing bonds and lend to whatever the government has designated. The policy rate reaches the borrower differently too: eighteen banks quote the Loan Prime Rate each month as a spread over the central bank's rate, and part of all lending is steered by “window guidance” — informal instructions on who should get credit and how much. 🇯🇵 In Japan the supervisor is the FSA, three megabanks (MUFG, SMBC, Mizuho) dominate, and the decade's big change is the return of interest rates: the Bank of Japan scrapped its negative rate in March 2024 and in June 2026 raised the rate to one percent, the highest since 1995 — so Japanese banks are earning a normal interest margin again for the first time in a generation.
• Non-bank lenders — a sub-block of the same zone: a leasing company buys an asset and lets the client use it while paying it off; a factoring company buys a supplier's invoices at a discount; a microfinance firm makes small short loans; a credit union lends to its own members out of their own contributions; a peer-to-peer platform matches a borrower directly with investors. Apart from credit unions they take no retail deposits, so they live on their own capital, bank credit lines, bond issues and platform investors' money — and in a crisis they are the first to lose funding. Supervision is separate and usually lighter: 🇪🇺 peer-to-peer business lending has had a single licence under the 2020 crowdfunding regulation since November 2021, and 🇺🇸 credit unions are supervised by the NCUA, which insures members' shares up to two hundred and fifty thousand dollars.
• Where all this came from: banks are older than central banks. The oldest bank still operating is 🇮🇹 Banca Monte dei Paschi di Siena, founded in Siena on 4 March 1472 as a monte di pietà — a mount of piety lending to the poor against pawned goods; it took its present shape in 1624, when depositors were given the income of the state pastures of the Maremma, the paschi that gave the bank its name. The oldest merchant bank is 🇩🇪 Berenberg of Hamburg (1590), started by two brothers who were cloth merchants and Protestant refugees from Antwerp. Early banking rested on three things: money taken in for safekeeping; bills of exchange, so that instead of carting coin across Europe merchants settled on paper, with Italian money-changers clearing the claims against each other in the closing days of a fair (🇫🇷 the Champagne fairs of the twelfth and thirteenth centuries — in effect the first clearing house); and, in seventeenth-century London, goldsmiths' receipts for gold left with them, which began to pass from hand to hand as payment. That is how a receipt turned into a banknote — and how the habit of lending out more gold than sits in the vault began. Central banks came later, and for practical reasons: 🇸🇪 Sveriges Riksbank (1668), the oldest central bank still in existence, was created after Stockholms Banco collapsed from issuing too many unbacked notes, and 🇬🇧 the Bank of England (1694) was chartered to lend the government money for the war with France.

Why it matters

A bank's problems become the whole economy's problems very fast: lending stops, payments freeze, people lose their savings.

Links to other zones · 29

• Anti-Money LaunderingBanking & Credit Institutions are the first line of Anti-Money Laundering: they identify clients and report suspicious transactions.
• Audit & AssuranceAudit & Assurance gives Banking & Credit Institutions an external audit of the accounts, next to supervisory reviews of asset quality and the judgement of rating agencies.
• Card networksBanks drive Card networks: the issuer gives out the card, carries the credit risk on the limit and earns the interchange fee on every purchase, while the acquirer signs up the shop and answers for it — if the merchant fails holding prepayments, the acquirer refunds the buyers.
• Clearing & settlementLarge firms in Banking & Credit Institutions act as clearing members, custodians and prime brokers, so Clearing & settlement for the rest of the market runs across bank balance sheets.
• Commodities marketBanking & Credit Institutions finance the Commodities market with letters of credit and loans against cargoes and warehouse stock, and sell producers and consumers hedges against swings in oil, metal and grain prices.
• Consulting & AdvisoryConsulting & Advisory brings Banking & Credit Institutions risk models, Basel and anti-money-laundering implementation, core banking replacements and support on merger deals.
• Corporations & Corporate FinanceCorporations & Corporate Finance are the core of the business of Banking & Credit Institutions: accounts and payments, loans and overdrafts, guarantees and letters of credit, placing spare cash. Big clients bring both interest margin and fees.
• Credit InformationCredit Information is a compulsory step in lending: Banking & Credit Institutions feed clients' payment histories into bureaus and credit registers and pull a report and a score before every loan decision.
• Crypto / CBDCStablecoins and central bank digital currencies from Crypto / CBDC compete with deposits; Banking & Credit Institutions answer with tokenised deposits and by holding the reserves of stablecoin issuers.
• Debt marketBanking & Credit Institutions are among the largest buyers of government bonds in the Debt market, holding them as a liquid reserve, and issue their own bonds there.
• DerivativesBanking & Credit Institutions are the main dealers in Derivatives: they sell clients forwards, swaps and options, and hedge the interest rate and currency risk of their own balance sheet.
• Development BanksDevelopment Banks give Banking & Credit Institutions long-term funding, credit lines for small and medium business, and guarantees that share the risk; large infrastructure loans they syndicate together.
• Digital paymentsDigital payments builds a friendlier interface on top of the accounts and licences of Banking & Credit Institutions: the bank gains volume and fees but risks losing direct contact with the customer.
• Education & CertificationBefore running a bank or its risk function, a specialist passes regulator fit-and-proper tests and the certifications of Education & Certification (FRM, CAMS, ACI) — the filter that guards other people's money inside Banking & Credit Institutions.
• FX marketBanking & Credit Institutions are the market makers of the FX market: they quote rates to clients and to each other, and every bank treasury closes its own currency position daily.
• Fiscal PolicyBanking & Credit Institutions buy government bonds as a liquid reserve and process budget payments, so trouble in Fiscal Policy passes quickly into the banking system.
• Households & IndividualsHouseholds & Individuals are both the source of deposits for Banking & Credit Institutions and their largest group of borrowers.
• InsuranceBanking & Credit Institutions sell policies over the counter (bancassurance) and require Insurance on mortgaged property; insurers in turn keep part of their reserves on bank deposits.
• Interbank systemsBanking & Credit Institutions are the participants in Interbank systems: central bank rails (🇪🇺 T2, 🇺🇸 Fedwire), SEPA, SWIFT and the card schemes.
• International transfersBanking & Credit Institutions hold correspondent accounts with each other and send instructions over SWIFT — that is how International transfers actually reach a bank in another country.
• Investment & Pension FundsBanking & Credit Institutions serve Investment & Pension Funds as depositories and prime brokers, lend against private equity deals, and sell fund units and ETFs to their own clients.
• Monetary PolicyThe policy rate set by Monetary Policy is the price of money for Banking & Credit Institutions, and therefore the price of their loans and deposits.
• Ratings & IndicesThe rating a bank carries in Ratings & Indices decides the price at which Banking & Credit Institutions borrow, and borrower ratings feed straight into their capital requirements.
• Real estate marketMortgages and developer loans are one of the biggest portfolios of Banking & Credit Institutions; when the Real estate market falls, collateral loses value and credit losses rise.
• Regulation & SupervisionRegulation & Supervision gives Banking & Credit Institutions their licence, prudential ratios and inspections, and backs savers through a deposit guarantee scheme.
• Retail accessBanking & Credit Institutions are the widest channel of Retail access: a client buys bonds or fund units inside the banking app, the bank earns the fee and holds the cash until the trade settles.
• State Insurance & GuaranteesExport credit cover and state guarantees from State Insurance & Guarantees cut the risk of a loan and the capital held against it, so Banking & Credit Institutions finance projects that would otherwise never pass.
• Stock marketThe investment banking arms of Banking & Credit Institutions bring companies to the Stock market through IPOs and follow-on offerings, underwrite the deals and make markets in the shares afterwards.
• Technology & InfrastructureTechnology & Infrastructure gives Banking & Credit Institutions their core banking, cybersecurity, digital channels and fintech partnerships.

Regulation and supervision

Careers in this zone · 10

All zones of the Atlas

• Clearing & settlement
• Exchanges & platforms
• Retail access
• Corporations & Corporate Finance
• Development Banks
• Investment & Pension Funds
• Anti-Money Laundering
• Fiscal Policy
• Financial Market Infrastructure
• Monetary Policy
• Regulation & Supervision
• Households & Individuals
• Insurance
• Commodities market
• Crypto / Digital
• Debt market
• Derivatives
• Stock market
• FX market
• Real estate market
• Card networks
• Crypto / CBDC
• Digital payments
• Interbank systems
• International transfers
• Sovereign Wealth Funds
• State Insurance & Guarantees
• Audit & Assurance
• Consulting & Advisory
• Credit Information
• Education & Certification
• Financial Media & Data
• Ratings & Indices
• Technology & Infrastructure