Exam 2 Questions Discuss How Banks Make Money And Are Struct ✓ Solved

Exam 2 Questionsdiscuss How Banks Make Money And Are Structured In Re

Discuss how banks make money, and are structured in respect to Asset, Liability and Capital Management – give examples. The theory of bureaucratic behavior indicates that the FED never operates in the public interest. Is this statement true or false, or uncertain? Explain your answer and give specific examples. it is a take home exam questions you will find most the answers in powerpoints (it should be an essay format 4 to 5 paragraphs) you should add graphs if you could +++the second homework is a geology homework it says everything in the document i attached

Sample Paper For Above instruction

The financial sector plays a critical role in the economy through its unique ability to generate profits while managing risks associated with their assets, liabilities, and capital. Banks primarily make money through the interest margin—the difference between the interest earned on their assets, such as loans and securities, and the interest paid on their liabilities, such as deposits and borrowed funds. This core function is complemented by fees for services like account management, transaction processing, and other financial products. A comprehensive understanding of how banks are structured in terms of asset, liability, and capital management reveals the intricacies of their operations and risk mitigation strategies.

Bank asset management involves the strategic allocation of resources into various income-generating assets. The primary assets include loans to consumers and businesses, corporate bonds, and government securities. For example, when a bank issues a mortgage loan, it earns interest over the loan term, contributing to its income. Additionally, banks hold securities such as Treasury bonds, which provide stable returns. Effective asset management requires careful assessment of credit risk and market risk to ensure the bank's financial stability. Banks also diversify their assets to withstand economic shocks, which is vital for long-term profitability.

Liability management revolves around attracting and retaining funds from depositors and other sources. Banks offer various deposit products, such as checking accounts, savings accounts, and certificates of deposit, which serve as the primary liabilities. By accepting deposits, banks gain a source of funds that can be lent out at higher interest rates, thus creating a profit margin. Moreover, banks sometimes raise funds through wholesale borrowing in the bond or interbank markets. The strategic management of liabilities involves balancing the cost of funds against the need for liquidity and stability. For instance, long-term deposits usually have lower interest rates but provide stability, whereas short-term liabilities offer flexibility.

Capital management is crucial for safeguarding against losses and supporting growth. Banks maintain capital buffers—equity capital and retained earnings—that absorb losses and comply with regulatory requirements such as Basel III. Capital adequacy ratios ensure that banks hold sufficient capital to buffer against potential loan defaults and market fluctuations. For instance, during the 2008 financial crisis, insufficient capital buffers contributed to bank failures, illustrating the importance of robust capital management. Proper capital planning allows banks to sustain losses without jeopardizing depositors' funds or facing insolvency, thus ensuring stability and continuous operation.

The question of whether the Federal Reserve (FED) operates in the public interest, based on bureaucratic behavior theory, is complex. The theory suggests that government agencies and regulators tend to prioritize their own interests over the public good, influenced by institutional incentives, political pressures, and internal hierarchies. Evidence shows that the FED's decisions often reflect a blend of economic objectives and political considerations. For example, during the 2008 crisis, the FED provided unprecedented liquidity support to large financial institutions, which some argue favored Wall Street over Main Street. Conversely, others contend that such interventions were necessary to stabilize the entire economy. Thus, the statement that the FED never operates in the public interest is an oversimplification—it is more accurate to state that the FED’s actions are shaped by multiple interests, including political and economic factors, often complicating its role as a public servant.

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