Role of Banks

THE UNIVERSITY OF ADELAIDE SCHOOL OF BUSINESS NAME : TRANG THI KIEU HO STUDENT ID : 1613946 CLASS: TUTORIAL 13 (12339) Banks play a central role in the economy, they create and maintain the flow of money between surplus and deficit unit and by this facilitate the process of production, distribution, exchange and consumption of wealth. If there were no bank activities, a large of amount of capital of the economy would be idle. Hence, banking activities are vital for the development of an economy.

Another function of the bank is risk spreading. They transform risky asset ( loans) to less risker liabilities ( deposits). They also conduct maturity transformation or liquidity providing function. Banks pool of short-term deposits and then give out long-term loans. They can do this base on the theory that different investors have different liquidity preferences. Hence, when banks do not work properly, it will affect the whole economy. In conclusion, a strong banking system is very important for an economy.

I think it is necessary to regulate the banking system because lack of regulation can result in some banks taking excessive risks and getting into trouble. A problem in banking system can affect the whole economy. In fact, some economist said that one of the reasons that led to the global financial crisis is the lack of regulation in financial system. Hence it is necessary to have more regulation to keep the banks working properly. Too much regulation, however, will decrease the competition in financial sector, the big will get bigger and the small who cannot compete will not be able to survive.

Competition between banks forces them to keep the interest margin low to compete. It also helps banks to have incentives to create innovation to work better and make more profit. This will bring much benefit to investors and borrowers. For all of these reasons, I think that we should have enough regulation to keep the banks working properly and avoid another crisis but not strict regulation so that not to decrease competition in financial system.

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