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4.5 Financial Intermediation, Banks and Financial Services

This section will describe the economic function of banks, their commercial business areas, and the concept of financial services.

4.5.1 Economic Functions of Banks

A bank can only become and remain successful if the financial services it offers satisfy a customer need so much that the price/performance configuration on offer will also be purchased effectively. So what are the fundamental customer needs with regard to financial services?

From an economic perspective, a functioning money-and-goods exchange system is a decisive competitive factor and thus an essential means for optimising the wealth of all citizens. A successful financial intermediation system achieves optimum capital allocation between all economic agents, at lower transaction costs and with fewer risks in comparison with other financial intermediation systems. Financial intermediaries fulfil five key functions, from an economic point of view (Bernet 2004, p. 8 ff.):

• Transfer function: safeguarding of efficient payment transactions

• Transformation function: period, lot size and life cycle transformation of money flows (saving, investing, financing)

• Risk balancing function: risk management to reduce uncertainty—as an intermediary between providers and receivers of savings, investment, financing and transfer services of money flows

• Logistics and service function: efficient processing mechanisms for financial exchanges

• Information function: preparation and provision of financial information of all kinds for all participants in the financial market.

Banks are financial intermediaries that make a key contribution to fulfilling the above functions. In accordance with the German Banking Act (KWG), a company is considered to be a credit institute if it conducts bank transactions commercially or in a manner demanded by a commercially-oriented business. According to Swiss legal practice, this includes for example the commercial acceptance of public deposits and the public recommendation to provide finance; large-scale refinancing of third-party companies or persons, as well as offering to acquire securities and providing services in the primary market (Bernet 2003, p. 25).

 
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