Part I The Elements of Bank Financial Supervision, 1 Introduction to Banks and Banking
- Banks as a lender — Definition of bank — Regulation of banks — Credit risk — Balance sheet
This chapter discusses the basic concepts of banks and banking. A bank is an institution that accepts deposits from the public and lends the monies thus raised. However, bank balance sheets include a range of types of exposures to a range of types of counterparties, which give rise to risks. To minimize risks, most banks diversify their lending across a number of different strategies and types of business. Both managers and regulators of banks have a task which in principle is relatively straightforward. These include understanding exactly which risks the bank is in fact exposed to; quantifying those risks; assessing returns which may be obtained through the taking of those risks; and assessing the degree to which the risks to which they are exposed are correlated to each other, in order to establish the total risk which is faced by the institution as a whole.