The following points will highlight the five essentials of a sound banking system. They are: 1. Safety 2. Availability 3. Liquidity 4. Elasticity 5. Stability.

1. Safety:

Bank deposits constitute the bulk of the medium of exchange in developed economies. So banking must be safe. It is necessary that banks should be in a position to repay deposits whenever demanded.

When a bank becomes insolvent a large number of depositors lose their money and suffer great hardship. Too many bank failures in a country will make the people hoard money instead of putting them in banks.

This will prevent the development of banking and injuriously affect production and trade. The safety of banks is therefore of great importance. In many coun­tries there are legislative measures intended to secure safety of the banking system.

2. Availability:


The banking system should be spread widely and evenly throughout the country. The facility of obtaining bank credit and of keeping moneys in banks should be available to all people — whatever be the area in which they reside and whatever be the industry, trade or profession they follow.

3. Liquidity:

The commercial banks are under an obligation to pay their depositors in cash, either on demand or on short notice. Banks must, therefore, maintain sufficient liquidity in their assets.

4. Elasticity:

Within certain limits it is possible for the banking system to create credit. In their lending operations banks are not restricted to the voluntary savings available in the community. The power to create credit, judiciously used gives elasticity to the supply of loanable funds.

5. Stability:

There must be stability in the operations of the banking system. There must not be undue expansion or contraction of bank credit. Undue expansion will create an arti­ficial boom while undue restriction will harm industry and trade.