Banking and micro-economics aspects.
The history of banking can be traced to the minting of the first currencies particularly the use of coins. Currencies arose out of the need for taxation in the ancient empires but later became less desirable as the empires expanded. The need to pay for foreign goods or services with something that can be exchanged more easily led to the differentiation of the currencies into different values. The political, social and economic structure of banking can be used to explore the essence of commerce in an economy. The banking sector has a considerable influence in the process of capital allocation, economic growth and the sharing of various risks the economy may be faced with. The banking sector is on the other hand affected by the social and political environment of the countries which the economy is based. In most countries the money is normally supplied by the central bank, which is the Federal Reserve in the United States (Rajan & Ramcharan, 2011).
The economic structure of the banking system is normally defined by the role it plays in the growth and the development of an economy and how it relates to the social and political aspects of the relevant countries. Commercial banks are organization that are involved in the buying of money from the depositors who usually surrender the utility of pending that money and are thus guaranteed interest and safe storage (Information Resources Management Association, 2015). In the United States and virtually other western countries, there exists a reserve banking system that is fractional where the banks hold a minimum amount of money that is determined by the government and can then loan the balance to the customers. The required reserves bring about money multiplier a system where the initial money is magnified in the system. A big portion of the loans given to the customer is thus the deposits belonging to the public a major explanation o why the banking sector is very fragile. This fragility results to a lot of regulations by the authorities. The banks are then expected to provide various unique services - means of payment and liquidity – to the members of the public. Due to the existence of frictions in the trading operations, money makes it very efficient to exchange goods and services rather than exchanging commodities with commodities. After the evolving of commodity money to fiat money, where it became as intrinsically useless but just medium of exchange, the role of the banks came into play (Rajan & Ramcharan, 2011). The banks have to play the roles of fiat management and the exchange of various currencies provided by the different institutions. The money-changing activities have brought about the definition of the structure of the banking system ad throughout the history these roles have determined what the management of the banks should involve. In the earlier times big cash imbalances among the merchants were very frequent in the commercial fairs and the banks came in to clear the positions of the merchants. Clearing activities became a crucial process in the United States and Europe especially at the end of 19th century which leads to the current day payment systems (Rajan & Ramcharan, 2011).
The banks structural role extends to the asset transformation. These include the banks acting as the financial intermediaries between to offer the missing connection between the financial products that are issued by various firms and the ones that investors desire to obtain. Quality transformation happens when the deposits in the banks offers better risk-return than the direct investments or when bank possesses better information than its depositors. The banks can also be seen to transform the securities so that those with short maturities are turned to long maturities a factor that is desired by the borrowers (Dong & Men, 2014). The function of asset transformation among the banks has further effects in the management of risks. The bank usually takes a risk when it is transforming maturities or offering liquid deposits which are normally guaranteed by loans that are illiquid. Managing the risks of interest rates has also become very important for the bank (McConnell, Böcker & Ong, 2014). Of more importance is the part played by the banking sector in the development and growth of countries’ economies, given those countries that are more bank-oriented like Germany and Japan have experienced high economic growth rates. Thus in commerce the banking sector plays a significant role in the organization of the micro-economics of the countries that are bank oriented. The banks thus act as buffer against the micro-economic shocks and make it possible to share the risks in the nations that are bank-oriented. This is also seen the functional role of the bank in the financing various factors of production in the economy. The economic structural of the bank thus revolves around the customer need for the safety storage of money and the availability of it in the investments portfolio (McConnell, Böcker & Ong, 2014).
The social structure of the banking sector defines the organization of the banks so that their main objective involves achieving a positive impact or contribution to the potential of all the individuals in the society so that they can develop currently or in future. The structural role can be linked to the concept of social banking where financial services are made available. The purpose of social banking is to focus on the way of satisfying the existing needs in a real economy and the community while at the same time considering cultural, social, economic and ecological sustainability. The banks orientation is thus to further the common good through the generation of numerous returns in regard to the aforementioned aspects as the major concern. (Acharya, Beck & Evanoff, 2013) The banks management thus remains conscious of its role in handling money as a formative medium. The generation of monetary returns is not regarded as the end but a prerequisite that ensure the necessary flexibility for going after the desired objective in an microeconomic environment that I always changing. The banking business is thus described as a continuous process but not fixed state.
In addition, the banks as financial institutions undertake the economic tasks of transferring resources from those individuals who have saved in surplus since they spend less as compared to their income to those with deficit resulting from more expenditure than income. The modern society creates new uncertain situations through the influence of new technologies and thus new products due to changes in commodities and the flow of cash in the sphere of the economy. The process may not bring about processes that are economically profitable but results to the development of social tools for risk mitigation which in turn is influenced by social structure and the distribution of power in the society (Weber & Remer, 2011). This goes hand in hand with the social responsibility role in the financial sector, which should not aim only at the enhancement of micro-economic activities but also the social well being in which the banks are operating (Weber & Remer, 2011). The management of the banking sector is not secluded from the society. The operations of the banking firms are aimed at profitability and growth which in turn depends on the satisfaction of the customers. If the firm’s leadership and culture undergoes positive change, the customer satisfaction will be achieved. In a microeconomic environment, the social responsibility emphasizes on the need for more professionalism that will focus on the ethical codes, transparency and corporations with social organizations. The essence of commerce in this sector is thus to have a society that is sees the need to cater for its needs while pursuing profit (Benedikter, 2011).
The political organization in the banking sector has been influenced by the need for supervision and regulation. The players in the countries’ economies are focusing o the interdependence between financial sector and banking which in turn influences on the commercial activities in these economies (Benedikter, 2011). This can be attributed to the various challenges such as financial crisis in the micro-economic environment. The need for banking takes place within the context of banking industry structure, considering the various activities that allowed or disallowed. This result to regulations imposed by the governments through the central banks motivated by the need for slight control in the micro-economic environment of the relevant markets (Rajan & Ramcharan, 2011). From a commerce point of view, ownership of bank by the government may result to short-circuiting of financial pressures on financial institutions to give credit extensions and the decisions on investment. The political structure extends to the government involvement in the management or setting up of regulations that control interest rates in the banking sector. (Rajan & Ramcharan, 2011).Thus a social, economic and political structure of banking sector plays a major role in determination of the idea on commerce.
References
Acharya, V. V., Beck, T., & Evanoff, D. D. (2013). The Social Value of the Financial Sector: Too Big to Fail or Just Too Big?. Singapore: World Scientific Publishing Company.404
Benedikter, R. (2011). Social banking and social finance: Answers to the economic crisis. New York: Springer. 22-42
Dong, Y., & Men, C. (2014). SME Financing in Emerging Markets: Firm Characteristics, Banking Structure and Institutions. Emerging Markets Finance & Trade, 50(1), 120-149. doi:10.2753/REE1540-496X500107
Information Resources Management Association. (2015). Banking, finance, and accounting: Concepts, methodologies, tools, and applications.33
McConnell, P., Böcker, K., & Ong, M. K. (2014). Special Issue on Behavioural Finance: Is there a role for behavioural finance in risk management and banking regulation?. Journal Of Risk Management In Financial Institutions, 7(2), 100-102.
RAJAN, R. G., & RAMCHARAN, R. (2011). Land and Credit: A Study of the Political Economy of Banking in the United States in the Early 20th Century. Journal Of Finance, 66(6), 1895-1931. doi:10.1111/j.1540-6261.2011.01694.x
Weber, O., Remer, S. (2011).Social Banks and the Future of Sustainable Finance. Taylor & Francis.52-65
