The Economy: The US Banking System

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

The economy of any country consists of numerous entities, which are vital for its smooth functioning. Each of these entities has a role to play and any disturbance or hindrance in their proper functioning would cripple the economy.

One of the basic pre-conditions for the growth of the economy is growing capital formation. Capital formation refers to the distraction of the economy’s productive capacity for the creation of capital goods which eventually increase the productive capacity in the future. Generally, the term capital formation refers to an increase in the stocks of material capital only. The most accepted financial intermediaries are Banks. Some of the other entities which perform the role of financial intermediation are Investment Banks, Insurance Companies, Developmental Financial Institutions, Non- Banking Finance Companies, Mutual Funds, Pension Funds, Quasi-Governmental Agencies, etc.

For decades, all the banks across the globe have focused on earning large sums of money from corporate clients. However, things have dramatically transformed today. Banks are awash with excess liquidity; interest rates are decreasing.

Corporations do not borrow from banks in a big way due to a variety of reasons like economic slowdown, infrastructural constraints, etc ((ICMR), 2003). Under this scenario, banks are forced to look into the retail segment for lending and therefore the spotlight has now shifted to the retail sector. Banks across the globe are experiencing cutthroat competition while trying to enter new segments – car loans, consumer loans, housing finance, educational loans, credit cards, etc.

The recent financial crisis in the United States can be related to what is known as “The Big Bank Theory” of finance and economics (Canadian Content, 2008). According to this theory, no government across the globe will allow any big financial institution or a bank to collapse so easily. This is because the after effect or the consequences of such collapses would be great and at a time will be out of control to handle despite how big the economy in which the collapse occurred (Farell, 2008).

Subprime mortgage crises have become an ongoing economic problem in various parts of the globe.

The basic reasons behind these crises may be described as contracted liquidity in the banking systems across the globe and also in the credit markets. Risky lending, excess of corporate and individual debt levels, risky practices of borrowing also can be added to the list of reasons for a subprime crisis to occur. Once the reasons as to why subprime crises occur are known, the next question that arises is as to what are the ways to avoid or decrease these crises from occurring.

One best solution would be a modification of loan lending (ICFAI Center for Management Research (ICMR), 2003). The financial crisis of the United States is undoubtedly hampering the entire economy on a whole along with the financial system. Hedge funds are believed to destabilize the global economy. No prescribed rule of thumb can be followed while dealing with hedge funds. But off-late, the trades of hedge funds have used diverse styles of trading. The long-short strategy that has been recently adopted resulted in the capturing of almost 30 – 40 percent of the businesses in the United States (Unknown, 2009).

There is significantly less amount of regulation in the U.S. financial market. Most of the banks and financial institutions of the U.S. market were not regulated and were also undercapitalized. Such institutions were the liquidity providers to the subprime markets. This being the scenario, whenever there is a solvency issue concerning certain institutions of the subprime markets, the so-called non-regulated companies faced a liquidity crunch and hence the trading used to stumble.

Lack of transparency in the market is another reason behind the crisis. During the 1930s and 40s, banks were pretty much used to taking hefty deposits and eventually made loans out of such hefty deposits that they received. Congress did not obstruct this sort of activity till 1956. IT was in 1956 that the Bank Holding Company Act was passed for keeping the financial-services conglomerates from collecting such massive amounts. That above-stated law passed by Congress created an obstacle between both banking and insurance in reaction to antagonistic acquisitions and development activities by Transamerica Corp., a well-known insurance organization that owned Bank of America and also a plethora of other business issues.

Quite a few attempts since the year 1933 by many commercial bankers of the United States, and regulators sometimes, to repeal exceptions to certain sections of the law which make separation of commercial and investment banking mandatory have not been victorious. As a result, the United States and Japan were forced to adapt to similar kinds of laws post World War II and this officially called for this kind of severance. Banks that are into investment banking were subject to the clash of interest and the same clash thus resulted in causing harm to the investors (Thomas Dohrmann, 2004). Activities that include securities trading are different from the way banking should be conducted.

References

Canadian Content. 2008. The US Banking System. Canadian Content. Web.

Dohrmann. T, Benjamin Y. Lieber, and Andrew W. Sellgren. 2004. A risk-management upgrade for US bank regulators. McKinsey Quarterly. Web.

Farell, Robert R. 2008. America’s Banking Crisis. The Real Truth. Web.

ICFAI Center for Management Research (ICMR). 2003. Economics for Managers. Hyderabad : ICFAI Center for Management Research.

ICFAI Center for Management Research. 2003. Commercial Banking. Hyderabad : ICFAI Center for Management Research.

Unknown. 2009. Is The American Banking System A Ponzi Scheme In Disguise? Financial Edge. Web.

Click Here To Order Now!

The Economy: The US Banking System

Do you need this or any other assignment done for you from scratch?

We have qualified writers to help you.

We assure you a quality paper that is 100% free from plagiarism and AI.

You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)