Banks run the economies around the globe, and they do it for making handsome profits. Bank makes profits either way, whether you lend your money to the bank or borrow money from it. There is a notorious notion of banks being the corporate giants controlling economies and taking every penny possible out of your pockets. But banks do offer unmatchable services; the financial markets of today would collapse in minutes without a stable banking system. We had seen glimpses of those nightmares in the past with global financial crunches, bank-runs, and stock market crashes, the worst thing, history always repeats. Optimistically, the banks also provide benefits to the economy in general, but which institutes or stakeholders of the system benefit the most with banking? When banks make profits, they benefit other stakeholders too. The Banking system stakeholders can range from the shareholders, the financial regulators, investors, lender and borrowers, the money markets, and so on. The impact of the banking industry on the economy and socioeconomic welfare is beyond calculations, so there can never be an agreed-upon order of beneficiaries of banking profitability. So which is the correct order of entities who benefit when banks make a profit?
The Federal Reserve or the Federal Governments:
One of the basic yardstick or indicators of measuring banking system profits can be the interest rates. Banks cannot charge uncontrolled interest rates to their borrowers, or make profits with investments of infinite interest rates. The Federal Reserve or the Federal governments around the world would be the biggest beneficiary when banks make the profits. The Federal or Central banks require banks to maintain a certain reserve percentage, meet liquidity criteria, lending restrictions, offering services to consumers. When banks make profits, they’ll perform well with respect to the Federal set parameters. Banks profitability would directly impact the interest rates, hence the inflation and economic growth. The federal apart from liquidity and other restrictions would be interested in keeping economic growth and inflation in check and at an optimum.
The Capital Market:
Closely residing with ladder topper the Fed would be the Capital Market making most out of banking profits. It comprises the financial institutes including banks, pensions and insurance funds, real estate, stock markets, and bond markets. Banking profitability would offer an extra cushion of comfort and investment options to the capital market players. The capital market’s prime role is the facilitation of long-term debts and investments such as bonds, forex or stock market investments.
Retail Banks and the Money Market:
Money markets performs the same way as do the capital markets except they comprise more of short-term transactions and liquid fund trades. The Federal would be again a beneficiary of the banking profits here with retail banks lending and borrowing from each other rather than the Federal. Banking profitability would translate to attractive money market investments in mutual funds, securities by the Federal, Forex funds, commercial papers, and so on.
The Corporate and the Retail Investors:
Financial institutes look for profitable investment options. Banking profitability would immediately attract corporate and retail investors. Other financial investors like Pension funds, insurance and mortgage funds, and real-estate institutes share the same financial advisory as competitors. The financial advisory and asset management market are closely connected and an adverse or favorable effect on one component would directly affect the others. For example, large banks took the biggest toll when mortgage and real-estate funds started to collapse which resulted in the global financial crunch in 2008.
Bank Consumers and Shareholders:
Apparently, the shareholders along with bank consumers (retail and individuals) should stay at the top of the ladder. In finance, the business’s prime function is stated as the shareholder’s wealth maximization. That holds for the bank shareholders both individual and corporate. The bank’s profitability would directly impact the shareholders’ wealth and financial stability of the bank. The consumers of banking products nowadays can switch to other options, as there is no dearth of banking options. In a broader sense, consumers would greatly be affected by banks changing interest rates due to fluctuations in their profitability. The banks would charge more interest to consumers’ products to recover any losses if their profitability or liquidity reduces.
The Bank Profitability and the Economy:
We have seen individual entities benefiting from bank profits from their regulators to their shareholders. The banks’ profitability and their liquidity (more often) affect directly the economic growth. Profitable banks would mean strong capital and higher retained earnings, reducing their risk portfolio. The banks would then lend more money to borrowers to steady the economic growth resulting in increased GDP. Lower profitability would mean a risky bank portfolio, causing the cost of capital to rise for the banks. The banks charging higher interest rates would also mean less borrowed money and slower economic growth.
Bank profitability would affect the economic system at large. All the stakeholder entities would also get affected by a change in bank profits, either adverse or positive way. We hope that now you understand which is the correct order of entities who benefit when banks make a profit!