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In: Finance

Do you think it is possible for depositors to discipline bank managers who are tempted to...

Do you think it is possible for depositors to discipline bank managers who are tempted to take unsound risks with their funds? Why or why not?

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Expert Solution

Banks lend loan to businesses and some might turn into non-performing assets, this means the borrower defaulted on the payment however a major issue arises when large loans turn into default and banks face risk. It is possible for depositors to discipline banks managers who take unsound risk based on retail funds but for a small depositors it might be difficult, for a large depositors this might be possible because retail deposits are the cheapest source of funds for the banks and when the customer reduces their deposit in a certain bank that means that the bank is being perceived as risky and customers are avoiding it. When these deposits fall the management might be forced to take certain steps where it will have to take action like reducing their NPAs, providing high interest rate to customers to attract funds, focusing on managing their risk more effectively. The customers can force the managers to be extra careful but for a small customer whose deposit might not be significant will not have much impact if it withdraws funds.

jeff jeffy answered 2 years ago
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