The Role Of Banks In The Economy Karyna Golovchenko group 16 The health of the economy is closely related to the soundness of its banking system. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner.
They provide specialized financial services, which reduces the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient.Furthermore, banks are essential for each country’s economy, since no growth can be achieved unless savings are efficiently channeled into investment. Loan facility provided by banks works as an incentive to the producer to increase the production. They provide loans and corporate bonds to the households and small or medium enterprises to run their businesses.
Additionally, nowadays many difficulties in the international payments have been overcome and the volume of transactions has been increased.Banks also play an important role in economy when they are involved in the process of government securities’ issue. Besides, various services and products offered by commercial banks such as car leasing, mortgage financing, credit cards provide easy accessibility of funds to the customers. Hence a great deal of money circulating in the economy is contributed by commercial banks. Banks are also an important element in implementing the monetary and fiscal policy by the central bank.When a central bank decides to introduce concretionary monetary policy, commercial banks have to increase their interest rates to comply with the central bank.
Therefore banks play an important role in bringing economic development in a country. To put everything in a nutshell banks provide such activities in each country’s economy: • Promotion of capital formation • Investment in new enterprises • Promotion of trade and industry • Development of agriculture • Balanced development of different regions • Influence on economic activity • Implementation of monetary policy, etc.The economic hardships of the early 21st century give us an example of the possible negative role of banks in economic development. Many countries, including the United States and some countries in Europe, have experienced the deceleration of economic growth. High unemployment, bad investment performance and political uncertainty have led to an environment of distrust which in turn has decreased the confidence between international banks and governments. This resulted in reduced credit rankings of several countries and increased interest rates for credit extended to those governments.
Such increased costs rippled, raising interest rates for government loans to businesses and individuals and reducing the funding available for socioeconomic programs like education and healthcare. In conclusion I’d say that as we can see banks are essential for every country’s economy as they are helping to cure a lot of economic ills and to gain country’s prosperity provided that there is a confidence to the banking system. Otherwise one can blame banks for country’s economic diseases, but as for me it’s up to argue, whether it’s banks who are guilty in distrust or the root cause lies in the government’s mistakes .
