Question

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.

Answer 1

Question 1 is not answered because material is not provided. However, a student can easily write about it.

2. What are the risks for the macro economy if a bank fails, that do not exist for other businesses?

Banks accept deposits at less interest rates, keep some money aside and lend it higher interest rates. This interest rates difference is main source of income for any bank. It is clear that banks are places where people park there hard earned money with trust. Borrowers also take loan with trust. Banks are not only lending and borrowing agencies but also give other facilities like drafts, acting as agency to facilitate issuing shares, issues credit and debit cards to make life easier. It also makes internet banking work and banks at our fingertips.

Hence, if banks fail then people lose confidence in economy as banks act as mirror of economic situation. Other businesses may work in isolation and may go down for its own reasons. Failure of a business or an industry may not act as signal to economic inactivity as banks do.

3. If banks could participate in other lines of business, what benefits would there be for consumers?

Banks will make profits and hence people may get credit at lesser interest rates. Banks can enjoy economy of scale. It will also generate more jobs. However, it will also have a risk as other businesses have in their own businesses.

4. 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.

In my opinion, banks should be allowed to diversify with cap on investments of its turnover to protect customers from undue risks. It will also increase businesses in an economy and banks can enjoy its specialization especially in financial services.

More jobs, more tax collections may start virtuous cycles in an economy.