Banks in the Macro-Economy and Regulation

Banks in the Macro-Economy and Regulation

Banks in the Macro-Economy and Regulation

Banks in the Macro-Economy and Regulation:Banks plays an important role in the economy, which includes accepting deposits and making loans. Commercial banks serve as financial intermediation through transforming some assets into different asset or liability (Freixas & Rochet, 1997). Banking institutions are entrusted by the economy to safeguard the finances of the people and other valuables. Again, they are required to offer loans at a reasonable rate in order to facilitate economic growth. However, in the recent past, there are some banks that have failed. This has triggered the need to ascertain what would happen to the macro-economy that does not exist for other business in case a bank fails.

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They argue that setting a separation blocks the economy from realizing the benefits of affiliation (Diamond & Dybvig, 1986). To my opinion, bans should be allowed to participate in other businesses in order to allow the economy to benefit. Again, when banks are involved in other business, the risk is diversified thus reducing the chances of financial crises.

References
Diamond, D. W., & Dybvig, P. H. (1986). Banking theory, deposit insurance, and bank regulation. Journal of Business, 55-68.

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