Question

Explain why the profitability of traditional banking has declined and how banks have responded.

Answer 1

The traditional banking businesses used to focus on the long term loans and issued short-dated deposits, that is short-term borrowing and lending long. Many economic forces have cut out the traditional roles of banks for further intermediation.

Deposits have steadily diminished its importance from the past decades. The traditional banking activities such as business lending has also declined in the recent years. Because of the declining in such activities, banks have twisted towards the non-traditional banking activities for maintaining their financial positions in the market.

Now banks are expanding their roles in dealing with the derivative products. Earlier banks used to have two main functions and they were lending money to the public and receiving deposits of the public. But as time has changed and so are the banks, they are not having these activities but a more number of activities and roles to be played. Banks are moving ahead step by step and playing many different roles to make the banking system more stable.

Banks are responding to such activities by formulating sound regulatory policies which will encourage the banking system and strengthen the financial positions of the banks, allowing them in making more profits. Earlier the regulators had to supervise the excessive risk taking which could threaten financial stability.