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Commercial Banks

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Chapter 2

Commercial banks

1.You are travelling to work by train when a student seated next to you notices that you work for a bank. She asks you what a bank is, why we have banks and what they do? In your own words, respond to her questions.

A bank is essentially a financial institution that acts as a payment agent for customers by providing a wide range of financial services including the acquisition and provision of funds. They are the largest group of financial institutions within a financial system andhence central to facilitating the flow of funds between savers and borrowers. Because of thewide range of services that they provide, most businesses, individuals and governmentsconsider them indispensable.

2.‘Banks have always been the dominant institutions within the financial system, but their relative importance has fluctuated due, in part, to changes in the regulatoryenvironment in which they operate.’ Analyse and discuss this statement. Commercial banks are the main financial institutions operating in all major international financial systems, accounting for the largest share of the assets of all financial institutions. However, their dominance has a direct correlation with the level of financial system regulation that is evident within a nation-state. For example, prior to the mid-1980s there was a high level of bank regulation in most major economies that constrained the development of commercial banks. This high level of regulation led to a wide range of new financial institutions evolving in competition with the commercial banks, hence diminishing the dominance of the banks. These days, however, due to the deregulation of the commercial banks, the banking sector has grown so much that the nominal value of their off-balance-sheet transactions exceeds their balance-sheet assets.

3. Within the context of a commercial bank funding its...

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