Essay about What Is the Disadvantage of Count Trader
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The title of this course is Management of Financial Institutions. This is a very broad and a far reaching topic. To make it possible, the course will concentrate on Bank management. Many of the concepts we will learn in course are transferable to other financial institutions.
To begin the discussion, let us define banks. What is a bank? What do Banks do? A bank is a chartered financial institution that accepts savings deposits and makes commercial loans. This is the most basic definition of a bank. However, if you look at banks, you will see that they take many types of …show more content…
How important are banks to the economy? Providing credit makes banks a vital part of the economy. If you look at the sub-prime mortgage, you will see that it took only 3 to 4 weeks for the economy to collapse after banks stopped providing credit. Without credit, business would not be able to invest in fixed assets, finance inventories, or support their customers financially. Without credit, consumers will not be able to make large purchases. This is exactly what happened in the sub-prime mortgage problem.
The sub-prime mortgage problem
The steps that caused it
As you will see later in the course, banks have to maintain a minimum legal capital. This capital is made up of a bank’s owners’ equity, known as net worth, and a small part of non-deposit borrowing. Any losses due unpaid loans have to be credited against the bank’s capital. Once the bank’s capital drops below the legal minimum requirement, the bank can no longer legally provide credit.
When a large enough number of banks lost their ability to lend, the economy in the US and in the world collapsed. We are still feeling these effects. The following is a more detailed analysis of the sub-prime mortgage industry problem.