Charging firms for cash deposits To banks, it makes sense by Lazarus - Book Report/Review Example

Banks make an effort not to disclose fully such information to the general public. This is evident since they do not disclose earnings form deposits although they account for around a third of the bank’s total revenues. Although these bank charges may seem little, they are quite substantial considering the thousands or even millions of deposits that banks receive periodically. Banks, however, defend their action to levy deposits. They argue that deposits cost money to handle. These costs arise as a result of time and encumbrance to the teller as a result of counting cash and also cost of transferring these funds.

They also pay some fee to the Federal Deposit Insurance Corp. for holding a large cash amount. However, this may be more rational if they only charged deposits that are in millions. It seems quite absurd to reason out that a bank like a chase bank needs 40 cents to handle every $1,000 deposited exceeding an initial deposit od 7500. According to the author, Banks should not charge levies for receiving cash. They are only seeking more profits.CommentaryAccording to my view, banks should not charge for deposits at all.

This is because deposits are part of their sources for economics surpluses. Without deposits, banks would not be enjoying benefits on credit creation (Strahan, P.E. & Weston, J.P. pg. 835). Credit creation is the process by which banks loan out credit given to an individual over and over again (Saunders, A. pg. 89). This is because borrowers do not always withdraw the entire loaned amount or redeposit it back to their accounts for safety measures. Banks take advantage of this idle cash balances and loan it again although they maintain a reserve ratio just in case a customer needs this amount.

When this is done repeatedly, banks make extra earnings depending on a factor known as a credit creation multiplier.A second reason why banks should not charge deposits is simply to encourage deposit inflows (Rhoades, A. pg. 280). Deposits are sources of funds that are directly loaned out even without considering gain on credit creation. Reduction in deposits has a directly proportional effect on the level of profit banks gain. Banks should therefore not pursue this source of revenue.Last but not least, banks should not charge on deposits especially on such low deposits.

This is because the most affected parties are small businesses. With the hard economic situation in America, such cost can lead to reduced investments, higher unemployment rates, low GDP among others. Policies should be formulated to control such incremental cost of doing business since they will lead to adverse effects on the economy.