Final answer:
The banking industry is driven by the process of banks making loans in financial capital markets, which is tied to the creation of money. However, if banks are not working well or under financial stress, loans may become less available, impacting sectors that rely on borrowed money. Central banks play a crucial role in ensuring the stability of the banking system and controlling the money supply.
Step-by-step explanation:
The banking industry is driven by several key forces. One of the most significant forces is the process of banks making loans in financial capital markets, which is intimately tied to the creation of money. When banks are not working well or are under financial stress, loans may become less available, leading to a decline in convenience and safety of transactions throughout the economy and can negatively impact sectors that depend on borrowed money.
For example, during the 2008-2009 Great Recession, many banks were under financial stress, resulting in a decline in the availability of loans. This had a detrimental effect on sectors like business investment, home construction, and car manufacturing that heavily rely on borrowed money.
A central bank plays a vital role in ensuring the stability of the banking system and controlling the money supply. A central bank's main responsibilities include conducting monetary policy, which involves changes to interest rates and credit conditions, and regulating banks to prevent widespread bankruptcies that can lead to a decline in aggregate demand and a deep recession.