Question
The last few years have been hard on commercial banks. They derive most of their profits from the gap between interest charged on loans and
The last few years have been hard on commercial banks. They derive most of their profits from the gap between interest charged on loans and the interest paid on deposits. But because of very low interest rates, the interest charged on loans was very low, while interest paid on deposits cant be lower than zero; if it were, people and companies would simply keep their money in cash. On top of this, banks have been required to build up their reserves. Its no wonder that banks didnt have much space to operate. This is reflected by very low profits and very low stock prices. Banks in Canada and the United States could have profited from the ongoing stock market rally, because commercial and investment banking didnt have to be separated. European banks, on the other hand, felt the full force of the profit squeeze.
Write a short report on how interest rates influenced the profits of commercial banks, and how increased reserves influenced their balance sheets. Explain and compare what impact legislation in Canada, the U.S., and the EU had on the profitability of commercial banks. (Note: Pay special attention to Basel II and Basel III, as well as other relevant regulation and international accords in your analysis).
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