Services Provided by Commercial Banks - Assignment Example

Commercial banks provide a variety of products, which include asset products and liability products. Carefully explain asset products and liability products. Identify two products from each category; describe each product and explain their importance to commercial banks and their customers. Commercial banks are financial intermediaries, providing help to entrepreneurs and businessmen by their extensive set of various services. Commercial banks provide many services but asset and liability products are topping the list. Asset Products: People generally misconceive the term “Asset products”, considering it as an asset for their business accounts. However, contrary to this thought, these products are actually assets of commercial banks. Basically, the term “Asset product” is used for Auto loans, House loans, Property mortgages and similar other credit facilities, provided by commercial banks to their customers. These services are considered as an asset of a commercial bank as the bank provides these facilities against some interest charges. Therefore, keeping the conventional definition of an asset in mind, we can easily infer what we mean by the term asset products (King, 2009). 1) Auto Loan: It is a very general kind of an asset product. Auto loan is by far a great facility and customers enjoy great facilitation through these auto loans. Analysing this service from customer’s perspective reveals that it is very helpful for blue and white collar workers, who cannot own an automobile on cash payments. Therefore, it helps them to get an important need of transportation on easy installments. Moreover, on the other side, bank earns interest on the loan which is a valuable addition to the banks cash inflow. 2) Property Mortgage: The facility of property mortgages also lies in the category of asset products. With the help of property mortgage facility, a person can afford to build his own property. This facility helps the person to pay off his property debt in installments, according to his income, against a nominal interest rate. In this way, it is not only useful for the customers, but for the bank also as it earns sufficient interest against its services. Liability Products: Liability products are also worth mentioning services provided by commercial banks. These services are pure opposites of the asset products and include chequing and saving accounts, certificate of deposits and other types of deposit services. The term ‘liability’ is used here because the bank is liable to pay interests to the customers on their deposits. Therefore, considering this fact, these services are known as liability products. (King, 2009) 1) Chequing and Saving Accounts: Whenever there is a discussion about liability products, the first thing which pops up in the mind is chequing and saving accounts which are more commonly referred to as “saving accounts”. It helps people to deposit their earnings and savings in a bank for free and earn interest over it, as well. Although, it is a liability for commercial banks but appropriate utilisation of these deposits help banks to earn hefty amounts over the deposition. Moreover, these deposits also help banks to maintain their liquidity and treasury. Therefore, these accounts are of immense importance both to the bank and to its customers. 2) Certificate of deposit: Another deposit facility provided by commercial banks is the ‘certificate of deposit’. It is a kind of liability product that allows customers to deposit their savings in a bank on long term basis. The larger principal and longer term increases the interest rate earned over that amount. Despite of the fact that it is a liability product for a commercial bank, it helps bank in earning profit. Banks provide these deposits to their impoverished customers in the name of a loan and earn a good interest over it. Thus, both actors earn good money through the use of this financial instrument. Examine how changes in market interest rates in the United Kingdom will affect the income a retail bank receives from its asset products. On the basis of assumptions, it is easy to ascertain the fluctuating market interest rates and its affects. However, these assumptions are never too accurate because drastic changes in any effecting element will bring distortion in the analysis. Study of the market behaviour of United Kingdom shows that in 2011, the rates will certainly fluctuate. It is a fundamental concept which states that on asset products, an increase in interest rate maximises the profit, whereas a decrease minimises profits. Therefore, considering this theory, we can deduce that income of retail banks is directly proportional to market interest rates. Retail banking is the name of dealing only with individual customers. Therefore, fluctuations in market interest rates will certainly affect the income of UK‘s retail banks. Usually, customers never compromise in getting facilitated with asset products at higher interest rates. Resultantly, retail banks in UK may start losing their customers. Nevertheless, lower interest rates will help getting more customers but will also minimise bank’s profit. This is the way changes in market interest rates will affect income of retail banks in UK. (Bank of England, 2010) In many countries, the term "national" refers to central bank. In reference to your own country identify and discuss four key functions of the central bank. In most countries, the term “National Bank” refers to the Central Bank. The national bank of UK is “Bank of England”. Despite its name, the bank of England is the central bank of UK. It is a monetary authority and has several duties to fulfil but its four key functions are discussed below: Monetary Stability: The core purpose of central bank is to assure monetary stability. Stability in prices and stability of currency are the two main things required for monetary stability. Bank of England assures that increased prices are in coherence with the government’s inflation target. If it is going beyond limits, the bank is liable to control it via adjusting the base interest rate. (Drye, 2001) Financial Stability: Being the central bank of UK, it is also a duty of Bank of England to maintain financial stability in UK. In order to achieve maximum financial stability, the Bank of England makes monetary and fiscal policies. These policies are made with respect to the behaviour of financial markets and prevailing situations. With the help of risk assessment, the bank’s financial stability committee tries to reduce the risk of financial instability by using different means which include Risk reduction, payment systems oversight, fiscal policy amendments, market operations and liquidity insurance. Banknotes Issuance: Representing the central bank of UK, it is a statutory objective of the Bank of England to issue banknotes. The bank of England has been issuing these banknotes since 1694. Currently, all Great Britain Pounds are issued from the mint of Bank of England, duly authorised and signed by the governing authority. Moreover, current denominations of GBP issued by the bank of England are between £5 and £100. Monetary Policy: It is the duty of the central bank of UK to design effective monetary policies. The objective of making these monetary policies is to maintain low price stability, low unemployment rate and stability in the price of GBP. Every year, the Monetary Policy Committee of the Bank of England makes an effective monetary policy targeting at the maximum of 2% inflation. It is the committee that decides basic interest rates and other important factors which helps stabilising the aforementioned financial elements. It is pertinent to mention here that the Bank of England reserves rights to make necessary amendments anytime in the monetary policy to control abrupt situations. Why has central banking become very important in the last twenty-four months in most countries? If we have a look at the last twenty-four months, we can observe that the world is suffering from recession. Not only the countries with emerging economies are declining, but mature economies have also worn out. Except few countries, all countries are suffering from great financial crisis. There are several reasons behind the downfall of economies. Countries that are still safe are just because of their strong central banking system. Central bank plays a pivotal role in stabilising the country’s economy and other financial elements. Therefore, countries having strong central banking are still safe and recession caused them nothing at all. Considering this fact that strong central banking plays a pivotal role, most countries in the world, for the last twenty-four months are trying to improve their central banking. Central banking with effective monetary and fiscal policies is the best source to tackle such recessions and economic downfalls. It is observed that by maintaining good central banking, seriously affected countries are also recovering. A recent research conducted by IMF revealed that central banks of countries like Russia, Kazakhstan and Greece have started adding up gold in their reserves (Ryan, 2007). The only reason understood of all these central banking activities is that the countries are trying to recuperate from recession. It is an admitted fact that a central bank with strong infrastructure can help countries in combating such precarious conditions. This is the sole reason why central banking has become important for most countries in the last twenty-four months. References Bank of England. (2010), “How do interest rates affect inflation?”, Bank of England [online] http://www.bankofengland.co.uk/education/targettwopointzero/inflation/ratesAffectInflation.htm Dyre, Paul. (2001), “Bank of England”, Wikipedia [online] http://en.wikipedia.org/wiki/Bank_of_England King, John B. (2009), “Services Provided by Commercial Banks”, E How [online] http://www.ehow.com/list_5991222_services-provided-commercial-banks.html Ryan, Neil R. (2007), “Central Banks are becoming Gold Buyers”, Gata [online] http://www.gata.org/node/4792 Read More