The banking system is a set of participants in the monetary market, performing banking operations and operating within the general financial mechanism.
The participants mean:
1) The central bank, which is the center of the banking system, conducts the state emission and currency policy.
2) Existing banks, both commercial and specialized.
3) Credit institutions.
4) Individual economic organizations.
5) As well as specialized institutions supporting the activity of other participants of the system: cash settlement and clearing centers, firms auditing banks, firms dealing with banks’ securities, organizations providing banks with equipment, information and personnel.
Basic principles of banking system organization
The following principles of banking system organization are distinguished:
The principle of a two-tiered structure of the banking system;
The principle of universality of banks.
The principle of two-tier structure
Two-tier banking systems are established in countries with developed market economies. The upper level of the system is presented by the Central bank. All other members of banking system act on the lower level.
The central bank, as the upper level of the banking system, has the following functions
banking supervision,
control over the settlement system,
Development and realization of the state monetary policy.
Issue of national banknotes and control over their circulation,
General oversight over the activities of the country’s financial and credit institutions and implementation of the financial legislation;
Issue and redemption of government securities; manages government accounts,
conducts foreign financial transactions;
regulates bank liquidity,
collects statistical data on all financial institutions, namely information about the size of their operations, the areas of the economy they lend to, and depositors.
The Central Bank conducts banking operations only with those legal entities that are credit institutions. Also, the Central Bank cannot compete with other participants in the banking market.
The second level of the banking system is banks and other credit institutions. They carry out intermediation in settlements, lending and investment, guided in their activity by the parameters established by the Central Bank of the money supply, interest rates, inflation rates, etc. All the second-tier participants must comply with the regulations and requirements of the central bank to the level of capital, reserves, etc.
Principle of universality
This means that all banks operating in the country have universal functionality. That is – the right to carry out all banking operations stipulated by law and banking licenses. The main operations are:
1) Attraction of temporarily free funds of enterprises and the population for the sake of deposits – that is, the temporary use of these funds on the terms of repayment, payment, urgency.
2) Opening and servicing bank accounts of individuals and organizations.
3) Lending to individuals and legal entities;
4) Operations with securities;
5) Safe custody of financial and material valuables;
6) Management of customers’ property by power of attorney (trust operations).