BANKS - THE CAUSE OF THE ECONOMIC WOES
Banks fulfill a vital economic function by accumulating the savings of an economy and channelling it to the investors and businessmen, who supplement it to their own equity. This flow of money from the savers into the investments in an economy and flowing back of the money to the savers, when they need them would not have been easy, but for banks. Banking is a business in which they aim to make profit for the shareholders. To achieve this they should meet the operating expenses and make a profit. Hence they price the deposits and credit differently, resulting in a gross margin.
While taking deposits is an easy task, deploying them as credit or investment is not an easy task. Most of the banks have about 40%-50% of the total assets in credit assets or loans. When they extend credit, banks has the responsibility of ensuring that the money will be paid back. It takes various precautions for this and in old style was to take security and lend money. While this old fashioned method may get ridiculed by modern bankers, that is the safest method. When Americans introduced balance sheet lending, it was a departure from the past. They studied the financial statements and based on balance sheet strength or cash flow will lend the money, without security.
Banks give money for retail and corporate customers. Both are to be strictly studied to ensure receipt of money back so that the bank can return the funds to the depositholders.
However, modern banks do more than giving loans. They underwrite, extend guarantees, provide letters of credit for domestic/global trade, transfers funds and several other services. They also invest in equity and public bonds. They act as issuers, arrangers and participants for raising money from individuals, companies or institutions. Whilst some very small businesses may be able to do without banks, all medium to large enterprises require banks in one way or other.
When banks lend irresponsibly or under take exhorbitant risks, the entire economy and the businesses in the economy gets affected. That's why governments panic when banks are in trouble and try to bail them out. During the bail outs of banks in 2008, lot of people asked "why banks? why not other businesses?" Banking system collapse equals economic collapse
