Question

2. Comment on the health of the existing banking system from the perspective of the following:

a. an investor in a large bank like Citigroup,

b. a depositor at a small local savings bank, and

c. as a US taxpayer.

Answer 1

(a): From the perspective of an investor in a large bank like Citigroup the health of the existing banking system is in the medium level and hence will not be considered either too good or too bad. Health of the banking system depends on health of the economy and the shape of the yield curve to a large extent. Health of the U.S. economy is, again, in the medium level and hence cannot be said to be too good or too bad. Loan demand and net interest margin will ensure better health for the banking system. On the other hand rising interest rates can hurt the health of the banking system to a large extent.

(b): From the perspective of a depositor at a small local savings bank the health of the existing banking system is good. The depositor is concerned with this deposit and hence will not be bothered too much with interest rate movements, actions of Fed etc. The local savings bank will have the capacity to remain well capitalized as it will be better insulated than large banks like Citigroup.

(c): From the perspective of a US tax payer the health of the existing banking system is good. Even under grim economic conditions the banking system of USA will be able to continue lending and will remain optimally capitalized. The tax payer’s money will least likely be used to bail out banks as the banks are well capitalized.