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The roles that banks play in an economy and the aims of prudential supervision
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Banks are considered as significant institutions to influence the economy of a nation that is why the study aims to discuss the significance of banks that plays in an economy. This includes assessing the functions of banks that can improve the condition of the economy in a long period of time. The study is curious about the impact made by banks to an economy, in which it seeks to explore the benefits and challenges that can be impacted by banks to a certain economy. In addition, the study seeks to elaborate managements and learning insights that can be utilized from the function of banks to an economy.
Part I. Background of the study
Bank is a well-organized financial institution or group of institutions installed across a certain society. There are different classifications of banks such as thrift, commercial, and rural banks that cater financial needs of each involved party that are living or transacting to other parties. The aim of bank’s existence is to provide opportunities for individuals, groups, and other organizations to invest their financial assets as well as liabilities. Bank executives believe that providing financial opportunities helps to circulate finances to local and foreign investments because it promotes socio-economic activities of involved parties to become productive. Banks are considered to be highly regulated to most financial systems of several countries around the world because these are institutions that facilitates significant amount of finances that can stimulate the economic structure of individuals, groups, and communities. Prudential supervision is the process of establishing financial guidance in order to improve banking or financial management, which helps to transform a certain economy to become productive as claimed by Schermerhorn (2009).
In history, banking can be traced from ancient Roman Empire who learned how to save gold coins and gem stones for future investments and expenses to their basic needs. When ancient cities flourished, our ancestors established trade of various commodities wherein they start forming an institution in order to keep their assets. Prudential supervision has been already established by our ancestors in order to provide effective financial planning and management of savings and investments. Using banks helps to protect their assets from any lawless offenses such as stealing or burglary. As for the record, Hayde (2009) related that Monte dei Paschi de Siena is the oldest operating bank in the world located in Siena, Italy since 1407. Bankers realized that they need to develop calculation skills in order to effectively manage banking systems during the middle age period dating back from the period between 14th century to 17th century era as related by Prieto (2012).
Part II: Body (Discussion and analysis)
Safe keeping finances
Banks are commonly known as finance keepers, which can be the first reasons why it was established during the ancient times. Many bankers and ordinary citizens believe that banks help to prevent financial or economic related offenses as an effective prudential supervision. As an example, if a person is going to open bank account and deposit a significant amount of money to an operating bank, they are certain that their money is now officially secured. Keeping their money to an operating bank helps to prevent violence, intimidation, and coercion. They are no longer at risk for being targeted for offensive activities because criminal offenders believe that they can gain monetary benefit knowing that their victim always carry their money wherever they go according to March (2011).
Banks refers to a financial agent allowing other individual, group, or corporation to established bank accounts in order to save or to start their business according to their personal interests. Henderson (2010) claims that most service operating agencies utilize banks in order to have common paying centers for consumers to settle bills. As an example, a cable service customer prefers to pay their bills by depositing their statement of account for a certain month directly to the account of the company in order to be free from any service liabilities from the company. Banks as payment agents helps to prevent scams against third parties because allowing consumers to directly deposit payments to a service operating company helps to prevent revenues to criminal offenders.
Banks are capable of accepting variety of financial funds from other financial institutions. These funds can be in a form of funds from current accounts similar to the role of being a payment agent, accepting term deposits, and to issue debts. Banks act as buffer zones for companies to have the chance to generate financial productivity to their businesses. Companies that are experiencing negative financial issues can now have the time to adjust their assets and liabilities in order to improve their revenues that can soon be paid to the borrowed funds from the bank in the future. Funds can be accepted by banks in partial or full payment depending from any circumstances experienced by the depositor or payee.
Creates new money
Banks is a business operating institution that generates profit from clients such as private individuals, groups, and institutions that play in an economy. Profits can be generated by implementing service charges represented by their banking and finance activities while safe keeping and processing financial issues. In each assets deposited in the banks, there are incurring interests that are generated monthly, bi-annually, and annually. Another income generation is when they create loaning services. Lending a significant amount of money contains interests, in which when the lending client is going to repay the total amount of assets being used; the rates are doubled or tripled from the original amount being leased. Banks owned by a state or a government could significantly benefit because the amount of revenues directly impacts its economy with the guidance of prudential supervision.
B. Beneficial impact of banks to play in an economy
Circulates monetary values:
Banks plays an important role in an economy by circulating financial assets and liabilities. It is an institution that helps to create a reasonable way of rendering transaction to investors and consumers. When there is a healthy circulation between consumers and businesses, it creates a return of investments to a certain society because it sustains microeconomic and macroeconomic productivity. When money is going to be circulated to local and international market boosts small, medium, and large entrepreneurs to generate revenues to the community. Bank helps to receive, produce, and gain monetary assets and liabilities so that there is a productive socio-economic process that improves local and foreign communities.
The role of banks guides consumers to save money and prevents an institution, group, or a private individual from excessive spending activities. People can learn on how to spend their money wisely so that they will not experience financial scarcity in the future due to effective spending of financial management. If the majority of local residents would be inspired to spend wisely, the economy of the community could significantly benefit from this particular circumstance according to Hewlett (2009). It is because using money in a smart way aims to prevent over or under-spending of assets that might affect investments as well as consumer demand. The long term impact of saving more money allows individuals to allocate their money for future investments that generates income in the future.
Cushions the economy
Central banks are responsible for regulating financial assets and liabilities of the economy. This includes enhancing interest rates and monetary reserves to be balanced in order to improve the amount of investment inflow and outflow to and from the country. Central banks are considered as an economic brain of a certain economy for the reason that it controls businesses, banks, and financial institutions to benefit the socio-economic status of the community as mentioned by Johnson (2008). If there are a low percentage of inflation rates, foreign companies and other states are going to infuse their confidence to establish economic partnerships. It is because there is a growing economic and financial productivity that is attracting investments to benefit both the consumers and the business companies.
Bank notes are strong indicators of monetary circulation because it is one of the most reliable services of bank as a financial operating institution. It provides safe banking and monetary transactions because there are liquidities that can provide significant trade indicators of a business company. Liquidation promotes transparent transaction because issuing receipts and recording transaction history provide evidences to improve the formality and legality of each transaction. Liquidated assets are usually intended for sustaining legal requirements of a certain economy in order to prevent legal ramifications such as lawsuits from third parties. Furthermore, it aims to promote safe banking and financial management for business entrepreneurs, consumers, and individuals.
C. Challenges that bank face in an economy
Global financial volatility
Volatilities of financial institutions from other parts of the world significantly influence local and international monetary movement of an economy. When foreign banks start to experience financial contractions, there are other foreign investors that are at risk of losing their investments. In the case of global financial crisis in 2008, most financial institutions shut their operations down because they filed for bankruptcy for being unable to control growing debts. Financial institutions that are operating internationally established investment networks that are experiencing investment volatility that can degrade the financial integrity of a certain economy. The socio-economic status of the society can be badly affected because people might turn jobless, homeless, and experiencing full of debts in the future according to Henry (2012).
The presence of lawlessness managed by criminal offenders is a serious consideration that is always monitored by several banks. This includes criminal organizations that are capable to rob a bank that can leave behind loss of revenues, damages, and injuries to bank employees. Hacking incidents is another considerable issue since operating banks relies heavily on computer networks that are responsible for manipulating and security confidential information that can be cracked by cyber criminals that are known to be expert in cracking secured computer codes. The existence of a rogue terrorist group in a certain locality affects the flow of revenues and financial equities because military aggression can shut down establishments that could halt the economy of a certain community.
Banking and finance personnel are easily tempted by the existence of monetary circulation affecting their daily routine while working in the banking institution. Some employees are going to get a slice of the funds being managed by the banks that can impact the integrity of the economy’s financial integrity as indicated by Prieto (2012). If the employee is a high ranking official of a certain economy, the risk of experiencing financial loss can be high because there is a large amount of money that can be corrupted that leaves behind creation of debts to the society. Corruption can spark public scandal because the person who had been trusted was found out to be the main culprit of generating corruptive practices against the banking agency.
Lack of financial skills
In history, the Asian financial crisis has been initiated by poor financial management of a certain bank in Thailand. Another is about lack of liquidated transactions and inefficient accounting management in a certain bank in the United States generated global economic collapse. These are classical issues of banking and financial management errors that are not usually monitored due to lack of audit and monitoring of transactions that were corrupted or involved in a simple mistake such as topographical error in computers. A simple mistake can generate significant financial problems in the future especially when a certain individual or group was involved in a financial related mistake. It is because finances are highly valued entities wherein each change that were observed could bring significant transformation to the economical structure of an institution or economy as claimed by Henderson (2009).
D. Management to weather challenges
Corruption is a massive problem that is always experienced by an economy under prudential supervision. Auditing agencies aims at tracking down malicious transactions could lead to eliminate corrupt practices of an individual, group, or organization according to Davila, et al (2006). Routine auditing helps to identify discrepancies that exist within institutions that are involved in monetary transactions to other parties in order to resolve funds that are stolen. Eliminating corruption is one of the best ways to improve banking system that can improve the economy. Western countries are now experiencing low corruptive practices, which allow banking system is improving their socio-economic integrity. Officials that are involved in malicious transactions with banks should be immediately apprehended by the government to prevent future offenses.
Most investors are choosing an area where there are maximized security units to prevent criminal activities. It is because whenever there is violence; business establishments such as banks suffer investment damages due to military atrocities as indicated by Johnson (2010). Dispatching law enforcement is a significant safety measure to prevent lawlessness to prevail across the community. Security provides banking investments to prosper because it makes investors comfortable knowing that they are in a position where transactions are continuously running due to safe banking. Security intelligence should be always imposed by the government so that any plan to target banks and other business establishments can be prevented. Armed forces should neutralize all criminal offenders because it helps to decrease criminal activities capable of shutting down banks as mentioned by Byrd (2003).
Banks have the power to limit loaning systems because loaning possesses the highest risk to affect an economy’s financial structure. Loaning should be strict because it helps to prevent financially struggling companies to create a worst case scenario in business management. Terminating loan contracts to holders that are delinquent helps to prevent transaction losses because delinquent loan holders could destroy the reputation of banking systems. Delinquent loans have been blamed for the global financial crisis because inefficient banking managers were unable to settle financial accounts for loans that are performing poorly. Loans are considered to be a risky investment because the amount of money that you are going to borrow will double or triple when you are going to pay it before the loan matures.
Top caliber applicants with experience from other financial institutions should be always considered to be a part of the banking team that helps to improve prudential supervision. It means that banking institutions can increase their productivity and helping to impact the economy if they employ well-experienced bankers. High academic skills and knowledge is not an exception because employees with a colorful academic record can bring significant improvement to the economy. The risk of poor performance is limited because employing efficient banking personnel always delivers tasks effectively and accurately. Banking institutions can significantly control rising inflation, monetary movement, and market volatility because they use their skills and experience to handle financial pressures according to Abeles (2006).
Banks is a significant institution in an economy because it helps to regulate and circulate inflow and outflow of finances to the society with the guidance of prudential supervision. People and the economy can save investments and securing future finances, which is the main function of banks. The strengths of banking help to control local and foreign market volatilities because it aims to protect investors and the economy productive in the long run. Banks are always faced with financial challenges due to inefficient financial management made from human errors. Challenges can be managed if banking institutions improves performance of financial managers who can become leaders and role models in order to prevent challenges from happening in the future.
- Financial management: is the systematic framework of financial assets applied to a banking institution in order to regulate the assets and liabilities in a long period of time.
- Inflation: Is a value that affects trade and investment of a certain economy.
- Finance: Pertains to the value of a certain product, service, property, or investments, which is used by investors and banking institutions to mobilize trade and investments.
- Economy: is sector of a certain country that is responsible for generating income, management of businesses, and improving the prosperity between consumers and investors.
- Loans: Is the amount of expenses and assets that are borrowed by an interested party for personal or business related purposes.
- Savings: Is referred to a certain amount of finances that are going to be kept for future expense intents of an involved party.
- Corruption: Is an undesirable practice where a certain individual, group, or institution is being involved in fraudulent practices that destabilize a certain institution and community.
- Investments: Is a financial or property value that is infused to a certain organization in order to establish a business.
- Consumers: Are individuals, groups, or organizations that aim to purchase a certain product or acquire a certain service.
- Commodity: Is a marketable item that aims to satisfy the wants and the needs of an individual, which is the consumer.
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