Question

A key way that banks create value for their shareholders?

1. Reduction in asymmetric information through the development of loan relationships
2. Transaction services
3. Federal funds purchased and sold
4. Transmission of monetary policy
5. International activities

Answer 1

Banks are basically businesses which impact the economy in a very major way because they form the financial backbone of the system. Thus it is highly imperative that they create value for their own customers and hence shareholders which will help them run the bank in with proper processes in place and hence be stable for the long term.

Value for shareholders is created when the underlying share price of the bank rises. Share price of any company is linked to ultimately the earnings of the company. Earnings basically means the net profits and hence the growth in net profits that the company creates. This growth in net profits will come by essentially two ways i.e. increase in revenue and decrease in operating costs. Revenue increase can be done by expanding the business and increasing the sources of revenue. Reduction in operating costs can be done by optimal use of the existing resources i.e. systems, staff, employees etc.

Thus all in all, out of the 5 options given above, the most acceptable would be transaction services. This is because the bank can levy a certain charge and ensure seamless service for these transactions.

While apart from this there can be ways in which some other options can also be accepted i.e. Transmission in Monetary policy can lead to being at par with the interest rate policy. Thus if there is a reduction in the lending rate, the bank would invariable become a preferred bank for many loan applications hence driving the asset revenue due to sheer volume.
Also international activities can give a boost the bank's revenue in terms of certain preferential exchange rates that the bank would be providing. Also facilities which the bank can provide internationally would benefit customers and increase reach globally.

Thus all in all there are many ways in which a bank can create value for shareholders.