Discuss the various reasons for the existence of banks
Introduction
Banks have traditionally played an important part in the financial system by acting as financial intermediaries. They brought together ultimate savers and borrowers. However, today banks do much more than just that. Banks have become financial services firms.
There are people who think that banks are not necessary for the financial system any more. Nevertheless, banks still exist and it is hard to imagine life without a basic bank account. In this report I will discuss different reasons for the existence of banks. I will discuss their traditional advantages over other financial firms as well as changes that were caused by technological and financial innovation in the financial industry that may have affected those advantages.
Main Competitors of Banks
As it will be shown in this report capital markets are the main competitors to banks. Unit trusts and money market mutual funds are also competing with banks by offering higher rates on investments while still providing liquidity insurance.
Capital markets – is a market for securities (bonds and stock) where companies and governments can raise long term funds. Capital markets consist of a primary market (where securities are issued) and secondary market (where securities are traded).
Unit trusts – are forms of collective investment constituted under a trust deed.
Mutual funds – are professionally managed forms of a collective investment that pools money from many investors and invests in stocks, bonds and/or other securities.
The Existence of Banks
There are eight traditional elements that explain the existence of banks (Llewellyn, 1999):
• Information advantages;
• Imperfect markets;
• The theory of delegated monitoring;
• Control;
• The insurance role of banks;
• Commitment theories;
• Regulatory subsidies;
• The special role of banks in the payments system.
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