Saturday, January 28, 2023

In what way are banks as a firm different from other business firms?

In what way are banks as a firm different from other business firms? 


Ans. There is one basic difference between banks ad other businesses. It is that other firms aim at profit maximization. But banks have to maintain a balance between profitability and liquidity. It can be understood as follows: 


Banks have two owners: Depositors and investors i.e. shareholders. Depositors want liquidity as they must get their money as and when they need it. But shareholders want profits so that they get higher dividend. But these two goals are not complementary but contradicting. More will be the liquidity, less will be the profits and vice versa. Cash is most liquid but least profitable. Real estate investment is most profitable but least liquid. So, it has to make such a balance amongst it s asset that gives it liquidity with profitability. 

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