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Sample Essay on Factors Affecting Banking Industry

Factors Affecting Banking Industry

The banking industry is one of the most important industries in all economies. It plays a crucial role in enhancing economic growth. However, it is an industry that is characterized by frequent changes in rules and regulations and laws that affect its profitability and growth. Effects of constant changes in the industry also affect structure and expenditure in the banking industry.

Banking industry has also been subjected to many radical changes in pricing. Pricing structure affects financial services because it leads to alternating period of expansion, contraction and intense competition within and outside the financial industry.

Fluctuating prices and securities volume

Banking industry is affected by fluctuating prices and volume of securities. It is essential to note that financial market conditions affect the value of securities being traded. It also affects the volatility of equity, interest rate levels and the shape of yield curve. Fluctuating prices also affects the demand for investment banking making it unfavorable. In the long run, banks end up making loses instead of making profits.

With fluctuating prices and volume of securities, banks are forced to purchase securities from different firms. This extends their credit because such securities come with risks. The risks are even greater when the market is declining as it reduces their collateral value.

Competitive factors and industry changes

The banking industry is highly competitive. Banks compete with investment financial institutions, broker dealers and with commercial banks. These competitors have better resources and greater capital therefore, it enables them to offer a wider range of financial products and services posing a great challenge to the banking industries.

Thrift institutions are also a competitive factor affecting the banking industries. This is because they offer securities traditionally. They expand their financial activities and derive more revenue thus, reducing profitability of the banking industry.

Changing laws and regulations

The banking industry is subject to changing rules and regulations. Various regulatory authorities including the Central bank use money policies and other regulations to protect the interest of consumers. The Central bank can also use monetary policies with an aim of enhancing economic growth. Such regulations affect the productivity and profitability in the banking industry.

Liquidity

Banks rely on credit facilities to finance its receivables, equipment, property and inventory. In some cases, securities and inventory positions from clients fail to deliver as expected causing loses in the banking industry.

Net capital requirements

The effect of net capital requirements affects the banking industry. This is because of stringent rules with respect to net capital requirements of financial institutions and security firms. Banks therefore have to struggle to expand their businesses or even to maintain the levels of their business nationally and internationally.

Litigation

Litigation is additionally one of the factors affecting banking industry across the globe. Banking industry involves substantial risks of liability. In the normal course of business, a bank or a financial firm can be named as a co-defendant in law-suits that seek substantial damages. Therefore, investigations and proceedings can cause a lot of damage to a bank’s reputation and its profitability.

Political environment

Politics can affect the banking industry negatively or positively. In a stable political environment, the industry thrives and vice versa.

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