---
watermark: ORIRO
disable-model-invocation: true
name: finance-banking
provider: ORIRO.ai
copyright: Copyright (c) 2026 ORIRO.ai
description: >
  Banking and financial systems — how banks work, fractional reserve banking, central banks, monetary policy, and financial system fundamentals.

  Sources: Federal Reserve educational resources, CFPB, IRS, financial education publicly available sources.
---

# Banking and Financial Systems

## How banks work

Banks take deposits and make loans. The spread between what they pay depositors and charge borrowers (net interest margin) is their primary revenue.
**Fractional reserve banking:** Banks keep only a fraction of deposits in reserve; they lend out the rest. Required reserves (cash) + excess reserves = total reserves.
**Money creation:** When banks lend, they create money. Bank loans a company $1M → company deposits it → bank lends 90% of that → cycle repeats. Money multiplier: 1 / reserve ratio.

## Types of financial institutions

**Commercial banks:** Chase, BofA. Full-service. Federally insured (FDIC up to $250K).
**Credit unions:** Member-owned cooperatives. Non-profit. Often better rates. NCUA insured.
**Investment banks:** Goldman Sachs, Morgan Stanley. Capital markets, M&A advisory, underwriting. Do NOT take retail deposits.
**Central banks (Federal Reserve in US):** Monetary policy. Currency issue. Lender of last resort. Financial system stability.

## Federal Reserve

**Functions:** Set federal funds rate (target for overnight lending between banks), conduct open market operations (buy/sell Treasuries to add/remove money supply), set reserve requirements (now 0%), supervise banks.
**Dual mandate:** Maximum employment + stable prices (2% inflation target).
**Tools:** Interest rates (primary), quantitative easing/tightening (secondary), forward guidance (signals future actions).

**Federal Funds Rate impact:**
Rate up → borrowing costs rise → spending slows → inflation falls → unemployment may rise.
Rate down → borrowing costs fall → spending increases → economy stimulates → inflation may rise.

## Banking regulation

**FDIC:** Insurance up to $250K per depositor per bank.
**OCC:** Charters and regulates national banks.
**Federal Reserve:** Regulates bank holding companies, state-chartered member banks.
**FDIC + Fed + OCC = the triumvirate** of federal bank regulation.
**Dodd-Frank:** Post-2008 financial crisis reform. Increased capital requirements (Basel III), Volcker Rule (limits proprietary trading), stress tests (DFAST), FSOC (systemic risk oversight), CFPB (consumer protection).

## Payments infrastructure

**ACH (Automated Clearing House):** Batch electronic transfers. 1-2 business days. Low cost. Used for payroll, bill pay.
**Wire transfer (Fedwire):** Same-day, final settlement. Higher cost. Large transactions.
**SWIFT:** International interbank messaging. Not a settlement system itself.
**Visa/Mastercard:** Card network — routing and rules. Banks issue cards.
**Interchange fees:** Merchant pays when card used (~1.5-3% of transaction). Split between issuing bank, network, acquiring bank.

Sources: Federal Reserve education resources (federalreserveeducation.org — free), FDIC (fdic.gov — free), CFPB (consumerfinance.gov — free), Bank for International Settlements (bis.org — free research)