Unit 5. Are banks special? Most US banks are privately owned, profit-making orga
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Question
Unit 5. Are banks special?
Most US banks are privately owned, profit-making organizations. Although they provide a service just as many other businesses, banks differ because of their importance in the macro economy. Policymakers have debated whether banks should be permitted to only do “banking business”, or whether banks should be permitted to engage in other lines of business such as selling insurance or buying and selling stocks and bonds. In this week’s assignment you will address that premise through the following questions;
1. Provide a brief (one paragraph) overview of this week’s material.
2. What are the risks for the macro economy if a bank fails, that do not exist for other businesses? 3. If banks could participate in other lines of business, what benefits would there be for consumers? 3. Overall, discuss whether or not banks should be allowed to enter other lines of business. Provide support for position from course and/or outside materials.
Your final product will be a paper that: ? Addresses each of the topic/questions above in total. ? Is APA fortatted. ? The body is to be 2 pages minimum.
The requirements for your assignment are: 1. Answer each question fully 2. Define the overall subject of each question. 3. Cite at least three (3) resources from this week’s materials
Explanation / Answer
Banks have been observed conducting many businesses to a point where they are dominating in the trading sector. In the United States, banks have been associated with entry into businesses that may risk the financial services they provide. However, there is concern for the government to regulate the kind services, some of the banks provide.
Do bank failures impact unnecessary externalities which lower economic growth? The externalities, should they exist, are a distinction of financial industry systemic risk. Many banks are a wellspring of non-topical risk given the social cost of any bank failure is more than the immediate losses to the claims holders of the failing banks. One key important element of the social cost is the frequent loss in output linked with banks failure (Great Britain & Great Britain, 2015). The failures of any company may result in externalities and losses in productivity, unless because of their significance in the intermediation procedure, the price and externalities related with a bank failure are probably likely to be much bigger than the ones created by the collapse of a commercial and non-bank entity. Another important characteristic is the absence of policies or federal government institutions to deal with the consequences of bank failures and bring a stable influence on the growth of economy. I will comment that the above two significant characteristics will permit us to draw more accurate measure of the economic costs of banks failures in relation to estimates obtained from other historical data periods. Fair competition is not secured because other banks with more financial power will dominate and struggle to monopolize some business entities (Nelson, 2015).
If most banks could take part in other businesses, consumers are likely to get some benefits from the engagement. First, these banks will be able to sell services to them through the internet. Thus, the customers will find the services easily and faster without wasting much time to visit the tellers and consultants, regarding the type of services they want. Even though there will be no fair strengthened international competition among some financial firms, still, consumers will be enhanced because, they can get insurance services from the same banks they are banking in and may buy bonds using their funds in the account without withdrawing or transferring the money to other organizations. It means, some of the processes are going to be simplified for consumers. Another benefit involves customers getting many services from one entity. For instance, if a consumer holds an account at World Bank, he or she can access banking, insurance and trading services in the same facility. Finally, some banks will not set credit limits to their clients because; the banks themselves are involved in the client’s business. Thus, consumers will be more enhanced in their trading activities.
Banks should not be permitted to engage in other lines of businesses because of the following reasons: first, bank failures initiate negative externalities that diminish economic growth (Kubota, 2013). The estimates of the loss in average output de-heightens bound measure of the systemic risk cost in the banking industry as it removes the direct depositing, credit and equity losses related with bank failures. Full-designed governments’ policies should project at mollifying the negative economic impacts of bank failures—principles such as deliberate bank supervision, the issuance of deposit insurance and effective bank resolution guidelines (Allen & International Economic Association, 2014).
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