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In: Finance

Discuss how investment banks operate, how they function in our financial system, and how they earn...

  1. Discuss how investment banks operate, how they function in our financial system, and how they earn money and the importance of investment bank’s reputation to its survival.
  1. Explain how Reserve Bank of Australia (RBA) retain control of interest rates. Explain which of the methods are more suitable in the current COVID-19 capital market.

Solutions

Expert Solution

a. Financial Institutions and banks are facing various risks in a pandemic as investors had defaulted in the payment. To overcome the issues a strategic plan is needed to be prepared which should be approved and clear in its vision.

The problem is faced due to the numerous regulations every bank had to follow like deposits would be payable according to depositors' obligation term. The deposit of demand received by the bank is payable on the customer’s request immediately and there is a sudden rise in it. Therefore, every bank is asked to maintain sufficient liquidity for meeting the obligation contractually as they had risen.

On the second hand, every bank wants to maintain sufficient balance so that they can invest and earn a profit or the possible return attributable in their favor. If all the funds a bank hold are invested or lent then there is a possibility that these funds would not be recovered by the bank at the time of emergency.

a. The varied corporation of banking should be clear regarding the control functions of the units in businesses and independent functions for the management of risk which will define duties that would be consistent with the requirement of business of banking.

The process or exposure a bank could face due to its condition financially because of some adverse step taken towards rates of interest. The changes in rate would impact significantly on the bank’s earnings and also the underlying value of bank property like assets procured and other liabilities payable.

The concern steps should be undertaken to overcome and mitigate the risk. Some are: -

· Risk Management of Interest Rate: -The steps should be undertaken to control and monitor the factors that are consistent with the risk by applying the adequate strategy. The higher level of the bank should be informed regularly by the risk faced due to guidance that is needed to be modified due to pandemic.

· Portfolio Diversification: - A bank should make a plan to diversify its investments by constituting a portfolio that will help in avoiding the risk of liquidity without taking extra efforts. As enough investments are to be made in short-term obligations so that they could be easily convertible into cash.

· Approved strategies and policies: -There should be adequate strategies to be followed at such time to retain its customers. Further, the bank should adopt the policy of investment and liquidity so that it would easily repay the number of depositors.

· Effective investments made: -The bank should have a clear understanding of the timing of investments that would be made to limit the risk of liquidity. Further, if there is less time or liquidity risk then it is recommended to invest in the short term as they are approachable.

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