FINANCIAL INSTITUTIONS ASSIGNMENT 1

DONE BY ASHWIN KAILASAM N(10utA08)

Basic arguments: 1.The main arguments for increasing equity capital requirements is that it will provide banks and incentives to take less risk the recent behind this is equity share holders are the real owners and even the firm doesnt them excepted return on their investments is not necessary before them to pay the return to the equity holders 2.since there is a economic growth in the economy, and the banks should provide loans at the same pace but if it is short of the capital to lend the money to investors, other banking institutions will make use of this opportunity to get a good perception in the minds of the investors. So we need to raise the capital requirement inorder to meet the increasing growth of the economy. 3.some of the banking institutions restricts the amount of money deposited by depositors to certain limit. They use some other ways to increase the capital through increasing interest rate for money borrowed & increasing the commission for other banking services like DD charges. So that they have enough capital requirement to meet the needs of the economy. 4. As per the tier 1 requirement , each bank should have capital requirement which is 4% of weighted average calculation of the total asset value in a bank. So if a bank doesnt meet this tire 1 reqirement, they need capital to meet the required conditions. Advantages: Depositors: High capital in the commercial banks would encourage the depositors to buy new securities like Treasury bills, equity or even bonds. This also can make the depositors to lend the money to the investors at low interest rate which would make the investments to increase by borrowing more funds from depositors. Location of commercial banks is spread all over the country. Thus making it easily available and accessible to the depositors. Share holders: There are several benefits given to the share holders. Some of them are listed below The inflation rate is greater than commercial bank interest rate but rate of growth for the stockholders is far beyond individuals who deposit in bank. Her are some of the additional benefits to shareholders y y y Dividend earnings. Bonus shares. Capital appreciation.

Society: The capital in the reserve bank is split among the state governments which they utilize to build fixed assets like dams and roads which inturn give employment to large group of people benefiting with money and property too through construction of these social buildings. Disadvantages: Stockholders: y y y Crash in share prices because of poor performance of the company. Sometimes companies go into liquidation. Thereby eroding the investment of ordinary shareholders. Dealing with fraudulent stock brokers may lead the stockholders to buy risky bonds.

Depositors: y y Interest rate earned from depositing in S&L banks is higher compared to the commercial banks. The commercial banks make the depositors to wait for a long time for any kind of banking services. So depositors mostly wont prefer to deposit in these commercial banks.

Society: y y y The transaction that takes place in internet banking may have the risk of hacking the information by a third person thus not making it so secure. The transaction that takes place in banks normally has a lot of paper works. Commercial bank does not provide credit purchases for the business thus making such people to stay away from thes commercial banks.

Additional funds needed when bank acts as broker: Rule 15c3-3 a broker or dealer must have $ 1,00,00 as their additional funds. But if they could not follow the rules mentioned they must maintain a fund of $ 2,50,000 when acting as a broker. Importance of Insurance Yes these new business of brokerage is insured by FDIC. So they have faith in these business if any critical situation occurs they can recover the damages or losses that can occur during that time. In the past few business went to bankruptcy due to subprime lending that doesnt have any insurance on the money we invest on a property. So the depositors have a greater risk at that time.

Reference: www.investorwords.com/955/commercial_bank www.economywatch.com/banks/commercial-banks www.quikr.com/commercialbanks www.mfc.org.pl/doc/pf/p/commercial_banks