Question

What methods can a bank use to increase its capital relative to assets?

Answer 1

Solution:

Bank uses the following ways to increase its capital relative

1. Interest charges: Bank charges interest on the amount lent to its different customers in the form of a loan. This Interest rate depends upon the risk involved with the loan.
2. Portfolio Management: This bank helps the individual or companies to invest their surplus money to earn a profit. The Bank charge fee for this service also.
3. Service charges: Bank charges for the services offered like ATM or Cheque book or overdraft service. This boost bank capital to a great extent.
4. Underwriting service: Bank acts on behalf of the customer as an agent to issue security. Bank charge percentage or fixed amount of underwriting fee for this service
5. Bank charges: Customers need to maintain a minimum balance in the savings account in case the customer fails to do so, Then bank imposes charges for non-maintenance of minimum balance
6. Mutual Fund Investment: Banks offer this service to their client in return of which bank charges commission on sale or purchase of the mutual fund units.
7. Bank offer Foreign exchange: Bank also sells forex at a higher price and purchase at a lower price the difference between the two raise bank capital.
8. Foreign exchange hedge: Under this bank undertake agreement to cover the risk of foreign exchange fluctuation and provide a hedge to its client through instruments like future and options
9. Bill Discounting service: Under this bank accept the bill of exchange and provide discounted amount to client upfront and earn profit between the amount of bill discounted and the full amount of the bill at the maturity date.