Banking have unique role in the economy. According to Corrigan (1982) they are special because: (1) they provide transaction services and regulate payments system; (2) banks offer backup liquidity to the economy; and (3) they are broadcaster of monetary policy. Due to importance of banking, there are number of theoretical approaches in evaluation of banking system. This could be difficult as operational scale of banks is distinctive. Banks serve role of medium exchange function of money, add value for storage of money. Moreover, banks have different leverage levels in comparison with other industries. For example, 0.5-0.6 is a usual debt-equity ratio for conservative commercial firm. However, banks could have debt equity ratio of 9 in some cases. There are four main approaches to the study of banking, which are * Analysis of a bank as a financial institution and its role in economic development. * Financial management approach. * A monetary economics approach (relationship between central bank and commercial banks). * Industrial Organisation Approach.
First three approaches do not reveal in depth the aspect of completion and structure in banking industry. Industrial Organisation Approach takes whole banking system as one industry and studies it. I.O. Approach treats banks as ordinary firms. However, takes into account: risk level, level of monitoring and level of investment, so wider set of variables is taken into account in comparison with standard firms.
In this model we assume that the bank is producer of deposits and loans services and its activity generates costs. Banks should hold some proportion of their money if the forms of reserves. If we assume that reserve-deposit ratio and currency-deposit ratio are fixed, we can obtain money multiplier figure that is used for deposit creation. Using this information government can fund budget