Intermediation & risk transformation
Banks pool loans and monitor borrowers to reduce idiosyncratic risk and information problems.
Money creation
New loans typically create new deposits (they don’t “use up” existing deposits).
Balance sheet (memorize):
Assets = loans, securities, reserves; Liabilities = deposits, borrowings; Equity = capital.
Net Interest Margin (NIM) = (interest income − interest expense) / average earning assets.
Rate risk: mismatched repricing/duration of assets vs. liabilities.
Liquidity risk: forced sales during withdrawals → realized losses.
Deposit insurance reduces, but does not eliminate, run risk (coverage limits, confidence).