Question

A good financial system much depends on smooth running of the banking sector, especially when it comes to capital mobility. Discuss some of the consequences the system might be exposed to if much freedom is given to non-banking institutions to facilitate credit transfers and mobility.

Answer 1

Banking system is the blood of any economy and banking system needs to be properly regulated in order to have a sound financial system as financial system depend upon the smooth running of the banking sector.

some of the consequences, a system might be exposed to, if the freedom is given to non banking institution are as follows-

A. the market size of these commercial banks are going to decrease due to emergence of non banking financial sectors

B. This will even mean that there is a high preference for the non-financial companies rather than banking companies

C. There would be lesser regulation for non banking financial companies and higher restriction for commercial banks so commercial banks would not be able to compete with them

D. There is lack of credit growth and decreasing market share which can hurt the future prospect of these commercial banks.

E. The role of these commercial banks as intermediaries are going to shrink due to emergence of non banking financial industry.