The Effects of Economic Stability on U.S Banking Industry

Economic stability, whether at the national or international level, has far-reaching effects in the banking industry.

Economic stability and the health of the banking industry are closely related; declines in economic stability have negative implications on the banking business. As the citation argues, whenever economic crises such as recession or a lowered value of currency plague economies, the banking industry is affected regarding profitability, public confidence, business model and federal regulatory interventions. Firstly, economic instability affects the profitability levels of the banking industry. Low-profit levels arise as the direct effect of a reduction in the number of consumers of banking services capable of soliciting banking services.

For instance, the value of currency in economies suffering from high inflation rates reduces. The implication, according to is that consumers are more reluctant to approach banks for loans. The consumer is less willing to pay interest on low-value currency since doing otherwise would mean achieving less than they would with a loan obtained at a stable economic period when the currency has more purchasing power.

Eventually, banks whose business model rest on the issuance of loans lose revenue. Secondly, economic slow~downs have the long—term effect of reducing customers’ trust in banks, when the economy suffers, the profitability of banks also lowers due to surging operational costs and customers are less likely to seek banking services such as credit facilities. In such dire operational environments, banks are risk closing business. As was the case with the Great Depression of the United States, some banks opted to close business.

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The overall effect in such scenarios is a reduction in the money supply. As is with high-interest rates, the effect is a reduction in the purchasing power of consumers. Hence, consumers face more challenges in their acquisition of goods and services that were previously affordable. Unable to access loans to improve their financial situations from banks closing due to losses, the reputation of the closed banks suffers. Thirdly, poor economic situations may force banks to restructure their services. Whenever the economy suffers, business investment also reduces. Therefore, banks targeting big borrowers, a bracket in which the high—borrowing investors belong, lose potential customers.

For survival, banks are obliged to seek new borrowers. This forces banks to restructure their business models to attract small borrowers. Effectively, this disrupts business flow owing to the legal and technical complexities involved in business restructuring. Alternatively, banks may choose to increase interest rates to maintain profitability levelst Such actions are usually unwelcome to consumer protection bodies and other lobby groups which may compel the federal government to take action. A possible action may include the imposition of federal regulation capping interest rates to protect consumers from exorbitant interest rates.

The effect on the banking industry is that the power of financial institutions to is limited regarding measures they might take to protect themselves. In conclusion, the success, and failure of the banking industry largely depend on a nation‘s economic success. A poorly performing economy lowers the purchasing power of consumers of goods and services, reducing the likelihood that they might take loanst Reduced loan-taking has a domino-effect of reducing profits obtained from the issuance of loans for the banking sector Some banks may risk closing and losing a hard-earned reputation More so, governments may have to interfere with the normal operations of banks when necessary. Ultimately, banks are obliged to design feasible initiative to protect themselves from unstable economies.