Unit 2: Banking
This unit introduces the different types of financial institutions and focuses on the various forms of banking, including depository and non-depository institutions. In this unit, you will learn more about the role of central banks and why it is referred to as the "bank of banks". You will also understand the role of the Basel Committee in setting the rules for international finance.
Completing this unit should take you approximately 2 hours.
Upon successful completion of this unit, you will be able to:
- outline the history of banking from the 17th century to today;
- describe the differences between commercial banking and investment banking; and
- analyze the role of central banks and their effects on financial markets.
2.1: Financial Institutions
While you read this page, think about what the key financial institutions are and the role they play in the process of financial intermediation. How do each of these financial institutions differ from one another?
As you have seen earlier, there are many different financial institutions. Some are depositary, while others are non-depository. Before delving deeper into the difference between the two, it is important to probe how banks came into being and what kind of services they offered. When and where was the first bank established?
This timeline gives a quick reference to the different financial services that were introduced and the time of their introduction, focusing on the UK's financial services.
This section discusses the difference between commercial banks and investment banks. Why were these two banks' activities separated?
2.2: The Role of Central Banks
Central banks determine currency exchange rates and interest rates, among others. These institutions play a major role in ensuring and promoting the financial stability of a given country. In the US, the role of the Central Bank is delegated to the Federal Reserve. Here, you will learn more about the Federal Reserve and its structure.
What is the difference between central banks, investment banks, and commercial banks? What is the relationship between the Federal Reserve and other central banks?
While reading this, keep in mind what you learned earlier about the Fed and its structure. Here you will learn more about the different branches of the district banks and what they do. You will also come to know about the ECB and how it operates. What does central bank independence mean?
It is vitally important to understand the role of financial regulations. Some states opt for deregulations while others overly regulate. That said, understanding how regulations play a role in preventing crises is important. Why are central banks referred to as lenders of last resort?
2.3: Basel and Capital Ratios
Basel recommendations were enacted to help evade any financial malpractice that could negatively affect the national and international economy. It is important to keep up to date with the latest recommendations. This reference will elaborate on capital adequacy and the capital requirements in the US. What banks in the US are subject to comprehensive capital analyses and supervisory stress?
Unit 2 Study Resources
This review video is an excellent way to review what you've learned so far and is presented by one of the professors who created the course.
Watch this as you work through the unit and prepare to take the final exam.
We also recommend that you review this Study Guide before taking the Unit 2 Assessment.
Unit 2 Assessment
- Receive a grade
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.