Financial Stability Assignment PDF

Added on - Feb 2021

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ISSUES IN FINANCIALSTABILITY
Table of ContentsINTRODUCTION..........................................................................................................................3MAIN BODY...................................................................................................................................3Effects of low interest rates on banks financial stability and performance.................................3Competitive threat of Fintech and Big Tech organizations for banking intermediaries andimplications for financial stability...............................................................................................6CONCLUSION................................................................................................................................9REFERENCES..............................................................................................................................11
INTRODUCTIONFinancial stability is the state in which financial structure or key financial market isresistant to economic shocks. Banks and other business face many issues in context of balancingfinancial stability, they have to deal with many problems which effect on business growth andsuccess (Williams, 2016). In simple words, financial stability is the part of financial system thatlead to profitability imbalances that raise endogenously in financial markets or as outcomes ofunforeseeable events or significant adverse. Changes in interest rate and financial regulation ismain issues that bring challenges for maintaining financial stability. It is paramount for economicprogress as most transactions of money in actual economy is made through financial system.With financial stability banks is able to finance profitable projects, payment settlement schedulesconverge from norm and asset cost deviate importantly from its intrinsic values. The presentreport is based on effect of low interest rate on bank financial stability and performance. Itexplains competitive threat of fintech and big tech firms for banking intermediaries andimplications for financial stability.MAIN BODYEffects of low interest rates on banks financial stability and performanceLow interest rates-Low interest rate environment is meant to stimulate growth of economy by making itcheaper to borrow money to finance investment in both financial and physical assets. Negativeinterest rates is one of the particular form of low interest rates. It occurs when risk free rate ofinterest usually set by the central bank is lower than historic average for the elongated period oftime. It is the type of monetary policy which is unconventional, depositors should pay centralbank to hold money than receiving interest on deposits. Low interest rates means willing to makebigger purchases and will borrow more that suprs supply for household goods. When interestrates is lower it effect on bond prices, as it moves up cost of borrowing becomes expensive, itmeans that needs for lower yield bond will drop, because of price drop (Smets, 2014). As interestrates move down, it become more easier for people to borrow money.Effect of low interest rate on bank performance and financial stability-Positive effects-Low interest rate impact on bank performance as it allow people to move towards takingloans like personal or others. It help to improve bank capacity to lend and bank balance sheets. It
provide positive affect upon banks performance and attract peoples towards them. Low interestrate system is beneficial for banks as well as help to raise their performance. Because of lowinterest rate banks grab the attention of peoples and provide opportunities who wants low interestrate loans for different purpose, it increase customer base. It help to improve quality of servicesand to offer the pleasant experience to customers. Interest rates stability typically effect withfinancial performance of commercial banks. Low interest rates lead to high demand for loans,people wants to take loans for improving their financial and personal crisis. It effect on banksbalance sheets and increase their performance more than before, strong customers based becauseof lower interest rate on loans build positive image of bank within market place which attractmore customers towards them. Low interest rates play significant role for increasing bankperformance and keep its financial stability. It considerably effect purchasing power of peoples,customers drive towards low interest rates loans for some specific purpose in which they have topay interest to banks. Lower interest rates allow consumers to pay money easily for taking loanas they cannot be able to have to pay higher interest rate to banks (Afonso, Baxa and Slavík,2018). With the help of lower interest rate banks can be able to build their positive image inmarket and retain customers with the for longer term period. Low interest rates make peoplesable to borrow money from banks and pay easily which increase financial performance of bankeffectively. It give opportunity to customers to start up their business and easily pay interest rateto banks. During financial crisis, several banks specially largest bank in UK like Bank ofEngland were found to have too little capital, which constricted its ability to make loans duringinitial level of recovery. By keeping short term interest rates lower, banks support recapitalizebanking system by helping to raise banking industry net interest margin which boots theirretained earnings. Low interest rates drive customers and provide benefits to pay interest rate atlower cost as it is beneficial for banks, they can retain peoples with them and gain its trusteffectively. Lower interest rate increase demands for loans and make people capable to pay offits loans easily. As it contribute to gain trust and build strong relationship between commercialbanks and customers. Low interest rate is one of the main reason behind increasing bankprofitability, losses in business and financial crisis lower interest rates help to overcome issuesand adversely affect banks that positioned itself for continued low rates (Dagher, 2016). Banksbenefits from low interest rates as they can raise assets prices, when banks maximize moneysupply, people finds themselves with more money balances than it needs to hole. In response,
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