Banking system Essay Example | Topics and Well Written Essays - 500 words

Banking system - Essay Example These activities include selling various insurance products, forming societies, and investment platforms for their customers. This is called ‘buy and sell’ in banking. Banks are literally buying and selling products to consumers as a vender would do. Profit maximization is one of the major core objectives of shareholders for establishing businesses. Therefore, as businesses, banks are out to make profits. Leverage refers to a process by which banks acquire assets using borrowed money and uses these assets to make more money hence enabling them to buy more assets than they previously had. This money is a profit to the bank and shareholders who have invested their funds in form capital in the bank. However, this process involves many risks and in some cases the assets acquired fail to generate more money than the initially anticipated hence resulting into the bank making losses. Either shareholders invest in banks expecting to get returns on their on their investment. However, banks also need this money to keep growing in order to increase their profits margins. Because of this, they are force to acquire more assets from other sources to enable them maximize shareholder profits. This process of leverage is therefore only effective if profits are made. Banks request for securities when they are making loan advancements to their borrowers. The bank then holds this asset during the period covered by the loan for the purpose of security in case the borrower defaults in payment. If a customer defaults in paying back the loan and the accumulated interest, then it can dispose the security to recover the loan and interest. Therefore, securitization is the mechanism through which banks and other financial institutions pool together different types of debts owed to them, then repackage them, and finally sell them as securities like bonds and CMOs to different investors maximize their gains These institutions engage in these