How banks sustain the economy
Banks are so-called financial intermediaries. They form the interface between investors and businesses. They collect the deposits of the capital providers and issue money in the form of loans to borrowers. Investors include, for example, private households who invest part of their money in the bank for profit, but also companies or the state. Likewise, all economic operators can also act as borrowers. Companies need money to make investments, private individuals take out loans, for example, if they want to buy a house or apartment or are planning a major purchase, and the state also acts as a borrower.
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The economic and monetary cycle
Banks are therefore important actors in the economic cycle alongside private households, companies and the state. By maintaining the flow of money as an intermediary between the interest groups, they ensure that the economic cycle remains in motion.
The course of the financial market crisis
Some banks got into trouble due to risky business, which aroused suspicion among market participants. The climax was the bankruptcy of the US investment bank Lehman Brothers in September 2008. Against the background of the increased mistrust of financial actors among themselves, lending between banks was severely restricted worldwide. The global supply of capital came to a standstill, which led to a sharp decline in production, especially in the industrialized nations.
Political intervention and the provision of massive financial resources made it possible to stabilize the financial markets and the economy as a whole. In Germany, credit institutions with a low-risk business model far removed from speculative business, such as cooperative banks and savings banks, stabilized the domestic banking market. Since 2010, the world has been in the process of incorporating the lessons learned from the financial market crisis into the international regulation of banks, for example, in order to avoid such distortions in the future.
Stability and banking supervision
Using the example of the recent financial market turbulence, the importance of the financial system for our economy can be seen. If the conditions on the financial markets worsen, this has negative effects on the regular flow of central economic processes. A stable banking system, therefore, plays a key role in a country’s economy. Credit institutions and financial services companies are therefore subject to particularly comprehensive controls and supervision.