Impact of Economic Environments on Banking Industry

Topics: Monetary policy, Inflation, Macroeconomics Pages: 12 (3590 words) Published: January 17, 2012
1.0 Introduction
The main purpose of this assignment is to identify the impacts of economic environments on banking industry. Economics environment is the collection of numerous markets interacts with government to deal with exhaustive individuals, businesses, and consumers sell and buy products and services at national and international stages. R.Glenn Hubbard, Anthony Patrick O’Brien (2008) suggests that economic environments basically separated into two different entities such as Microeconomic and Macroeconomic. Economic models are used to analyze and clarify decision making in many domestic and international areas. Microeconomic is the study of how households and firms make their decisions, how they interact with markets, and how government influences their choices. On the other hand, Macroeconomic includes the topics such as inflation, unemployment rates, and economic growth and also comprehends that policy issues made government interventions to regulate economy. There are five major Elements of Economic Environments which are EconomicLegislations, Economic Policies, Economic Conditions, Economic System and International Economic Environment (TR Jain, MukeshTrehan, RanjuTrehan, 2008). Those Economic factors which effect on the working of the business are known as economic environments. Besides, Macroeconomic has the crucial impacts on banking industry during the period of economic cycles. Banking industry apparently business provides financial services and serves as accumulator of deposits from public tomake loansto others. It strengthen the efficient allocation of capital stock, provides essential transaction and intermediation services and funds the development of new businesses (K.P.V. O’Sullivan, 2010).This process keeps recycling until the end to ensure that liquidity in the markets. Meanwhile, any changes of economic environments prone to influence on financial institutions policies such as banks and federal bank to regulate economic varying conditions.

2.0 Economic Conditions (Recession)
Basically, economy experiences various economic cycles. Sampat Mukherjee (2007) suggests that there is four phases of the economic cycle which are prosperity, recession, depression, and recovery. Most economists believe that society is capable of preventing future depressions (recession) and inflations (booming) through integrative Federal bank and banking industry’s efforts. When recession strikes the markets, the living standards keep decreasing, unemployment rates intensively heighten and trading businesses stop expanding. Meanwhile, economic recession shows a sign of significant decline in all industry sectors across the nation and gross domestic product (GDP) at least two consecutive quarters for long lasting more than few months. What cause the recessions? N. Gregory Mankiw(2008)is a researcher of the US economyduring the recession in 2001. In his statements strongly recommends that -Low demand: Aggregate demand curve shift to left due to household reduces their spending on major products and services while the economic uncertainty. -Plantation Closures: Many companies need to amputate some of their plants in order to cut cost due to decrease of profits. -Job layoffs: Because of bankruptcy and plant closures, the employment rates raise more higher. Performance per employee may increase, but morale may suffer as hours become longer and wages remain constant although works become harder. Workers more concern the job layoffs than job conditions or welfares. -Stock market decline: The ambiguous anxieties of stock investors sell their stocks at once, tremendously destroy stocks’ value. During recession,KennethMølbjergJørgensen (2007)mentions that banking industry mostly suffers losses of doubtful debts because of trading businesses and also individual bankruptcy. Therefore, most commercial banks initiate liquidity crunch which result in a tight situation where it has become extremely difficult for individual loans...
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