Question

How important is the banking system in this country? What are the arguments for and against the maintenance of strong banks, even at very high costs?

Answer 1

Banking System plays most critical role in development and growth of economy. Banking system collects money from surplus sector and distributes it towards the deficient sector. it meets the requirement of deficient sector. Investment needs are met through the banking sector. Banking sector rewards both savers as well as investors. High economic growth has been possible only due to availability of sound banking system.

Arguments for strong banks:

• it creates faith of people in banking system.
• it helps to deal with some financial crisis easily.
• it contributes positively towards the growth and development of economy. During the initial phase of growth, people are suspicious about banks, hence, strong banks can infuse trust.

Argument Against:

• it does not promote competitions, as small banks can not compete against strong ones.
• Banks are involved in rent seeking behavior.
• Innovations are thwarted.
• One crisis hits these strong banks, it becomes difficult to deal with it.