Traditionally, the core activity of a commercial bank is to take deposits from individuals who have a surplus of resources and to allocate those resources to productive activities. Banks thereby perform three main functions. First, they provide payment and settlement services to households, entrepreneurs, companies and other financial institutions.
Second, they enable savers to reap the full benefits of long-term investments, while still being able to access liquidity when needed. Third, they assess and monitor the creditworthiness and payment behaviour of borrowers more efficiently than an individual investor could. Through these activities, banks reduce the inefficiencies caused by asymmetric information and incentive problems between those who save and those who borrow.