The Effect of Rising Cost of Funds on Banks and Its Indirect Impact on Economic Growth - Dissertation Example

The paper "The Effect of Rising Cost of Funds on Banks and Its Indirect Impact on Economic Growth" is a perfect example of a business dissertation. Prudential developments since the global financial crisis of 2007, have paid significant attention to risk-taking behaviour by banks and financial institutions in general. Scholars, economists and observers have all maintained that banks’ excessive risk-taking behaviour is the primary cause of the recent global financial crisis of 2007. Prudential regulators responded by introducing a framework for controlling risky behaviour by those within the financial services sector. The main regulatory response is captured by Basel IIII which increases the minimum capital requirement for banks and increases the supervisory role of officials. This revised prudential framework has resulted in the rise of the cost of funds and in turn, this has had detrimental consequences for banks’ profitability with indirect negative consequences for the economy. This research study explores and describes the impact of the rise of the cost of funds on banks and its indirect impact on the economy. A narrative review of literature is conducted and the results are examined using the three main theories of banking: financial intermediary, fractional reserve, and credit creation. Results demonstrate that the way that banks create and distribute funds and essentially act as efficient and effective financial intermediaries are compromised by increased capital requirements and heightened official supervision. The ability of banks to create funds and stimulate economic recovery, growth and development are constrained and the main focus is stability rather than growth and development. In short, this study found that the increased capital requirements and government supervision have created a financial environment where the cost of funds has increased. As a results banks lack the flexibility necessary for acting as effective intermediaries with negative consequences for their profit efficiency. Given the role that banks play in the economy, the lack of profitability by banks has also starved the economy with the result that economic growth and development is stagnant rather than growing and developing further. These consequences for banks and the economy are explored and described in this research study.