Should Policy Makers Prioritize the Development of Banks and Stock Market for Economic Growth
Starting off with the Banks, it is a financial institution that accepts deposits from people and use that deposit for the lending purpose. Banks play an important role in the financial market as they offer random services like investment funds and loans that encourage different investors to invest in different areas that help grow the economy of a country (Case Fair, 2004). The economic functions of banks include the issue of money in the form of bank notes and current accounts that are subject to cheques or payments on customers order. Another function is netting and settlements of payments banks act as both payments and collecting agents for the customers, participating in an interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments (Case Fair, 2004). This enables banks to economize on reserves held for the settlement of payments, since in and out movement of payments offset each other. Not only that but it also enables the offsetting of payment flows from geographical areas hence, reducing the costs of settlement between them. Credit intermediation and credit quality improvement are part of the functions as well where in credit intermediation banks borrow and lend back to back on their own account as middle men and in credit quality improvement banks lend money to ordinary, commercial and personal borrowers that are ordinary credit quality, but are high quality borrowers (Case Fair, 2004). Though the improvement comes from the diversification of the banks assets and capital, which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position (Case Fair, 2004). Maturity transformation also adds the list of functions that is where banks borrow more on demand debt and short term debt, but provides more long term debts to the customers. In other words, they borrow short and lend long. With a strong credit quality than most other borrowers, banks can do this by aggregating issues like accepting deposits and issuing bank notes and redemptions like withdrawals and redemptions of bank notes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources e.g. wholesale cash markets and securities markets (Sameulson Marks, 2005).
Now coming on to Stock markets, a stock market or a share market is a public market (a loose network of economic transactions not a physical facility or a discrete entity) for the trading of company stock and derivatives at an agreed price there are securities listed on a stock exchange as well as those that are only privately traded (Mankiw, 2002). It is one of an important source for the companies to raise money in the market. This allows businesses to be publicly traded and get additional capital for the purpose of expansion by selling shares that is diversifying ownership of the company in a public market (Mankiw, 2002). This brings up the liquidity through the exchange in which the securities can quickly and easily be sold out, which also is an attractive feature of investing in it as compared to other lesser liquid investments like real estate. Over the years the price of the shares and other assets has played an important role in the dynamics of economic activity and has influenced or can be an indicator of social mood. In a country where stock market is ascending, is considered to be a boosting economy. In fact, stock market is often considered as a primary indicator of a countrys economic strength and development. A rise in share prices tends to be associated with increased business investment and vice versa. As the share prices affect the businesses, so do the wealth of households and their consumption. Hence, Central banks (Bank that is granted the exclusive privilege to lend a government its currency) tend to keep an eye on the control and behaviour of the stock market and, in general, on the smooth operation of financial system functions (Mankiw, 2002). The fluent functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment (Mankiw, 2002). This way the financial system contributes to increased prosperity.
The policy makers have a huge responsibility to decide whether to give more emphasize on the development of banks and promote stock markets, both, either of the two or none of them. The banks are there to encourage the investors to borrow and from banks and invest in different companies in the form of cash or buying stocks and wither of the cases they are promoting growth of the company as well as their personal wealth (Sameulson Marks, 2005). The banks are made to facilitate individuals and economy at large. Now some of the countries in Asia are on the verge of development in their economy and banks playing major role in that as some commercial banks are provided with a bulk of cash in their reserves to lend and investors taking full advantage of it by using them at a right place that is in the market and getting huge dividends of it. The stock markets as discussed previously as well are the means of easy investment in companies that is intangible in nature. The motive of both is same that is for the betterment of people and economy at large. People in many countries who previously used to save their belongings in banks and gaining interests on that now are shifting more towards the investments directly in the financial market that is in the form of buying stocks (Sameulson Marks, 2005). Though this change in trend is taking place mainly in the developed countries, as the financial systems in most western countries have undergone a remarkable transformation with a portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via the traditional bank lending and deposit operations, but the influence of this sort of investment has come across third world countries and countries are looking forward to this riskier approach as compared to the banks. The reason why it is riskier than the banks because the number of fluctuations that occur in the stock market all around the world in no time as compared to the bank deposits or bonds. This riskier long term saving requires that an individual possesses the ability to manage the associated increased risks as this is something that can affect not only the individual investor or household, but also the economy at large scale. The developments of banks and stock markets are both important for the countrys economies but at the same time there has been a history where the downfall of banks and stock markets have dented a countrys economy badly that were highly depending on the banks and stock markets, like a stock market crash in 1929 that lead to A Great Depression and the Downfall of Major banks Like Lehman Brothers in the start of 21st Century that has caused the recession all round the world and affected almost every country in this world directly or indirectly. Thence, it comes on the policy makers to check their countrys strengths and weaknesses in the market and also the ability to handle dreadful situations of the stock markets and the banks in their country.