Link: http://www.vancouversun.com/business/fp/Canadian+banks+keeping+money+moving/1319205/story.html
Summary:
As we may or may not know, the activities done by the bank these days are adding to the severity to our current recession. Because our economy is slowly declining, many people would go to the bank for a loan. Taking advantage in this rare opportunity, the banks require higher interest rate on loans and more secure mortgages, in order to make the most profit out of customers. The reason for this approach is to safely guarantee that the money lent out will be paid back in full. For those who fail to pay off their loan, the bank would experience a less serious loss by collecting more interest during the period of their loan. As the vice president of commercial banking, David Pinsonneault claims, "we want to diligently serve our clients and take advantage of opportunities." This action ironically causes banks to be blamed for the meltdown of the financial markets in the world. For one thing, it causes hardship for those who are under a loan. For another, it makes lowers the wealth of our economy, greatly weakening the financial portion of the country. Under such circumstances, it is certainly debatable as to the fact whether the “safe” approaches done by the bank are right.
Connections:
As learned from section 15.1 in our textbook, there are two types of users of financial statements for a company – the insiders and the outsiders. The insiders of a company are its owner and executive and management groups and the outsiders are bankers and other creditors, prospective investors and shareholders. Being one of the major outsiders, bankers ultimately look for the company’s ability to pay the loan. To break that down, they specifically look for the net income figure and the assets that could be cashed from their financial statements. This is exactly the case in this article. If a company is well-prospering, the bank would offer a lower interest rate because they are quite certain that they will get their money back. On the other hand, in an economic recession, this is not the case. Due to the uncertainly of whether the money lent out will be gone forever, bankers tries to protect the bank by demanding a higher interest rate when lending out a loan. Even though this safely approach appears to be rather beneficial for the bank, it is dramatically adding to the severity of the current recession.
Personal Reflection:
As a student in the business department, I strongly believe that the bank should not bare any blame for the economic recession or financial meltdown, as said in the article. For one thing, this approach only protects them from experiencing any form of loss. Since the ultimate goal in every business is to make a profit, it is reasonable for the bank to do anything prevent any net loss for their company. It is not logical to purposely favour the customer and save the economy by purposely losing money in their business, in essence. Accordingly, the bank would also compensate by offering a lower interest rate in those putting their money in the bank. Even though it is true to a certain degree that their actions are declining the economy, I personally believe it is not their fault and they should not bare any form of blame or criticism by economists.
- A. Tao
Block A
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4 comments:
Alex seeing as no one else has completed their blog, I guess I am forced to comment on yours. Bank should not be at fault for the economic crisis as they are only protecting their assets. All companies are entitled to the safekeeping of their assets, and people just have to deal with that aspect. The Government in my case should be the blame for the economic crisis as they are spenders and not savers. Government should not spend money on useless things like the Gateway Project but should spend cash on fixing the economic crisis. In closing the crisis is not the banks fault.
The both of you make perfectly good sense, but I can not say I completely agree with either of you two. I believe banks should be blamed for the proceeding financial problems in the world today. I think this because during or prior to the recession, the government had to "bail the banks out" because they had lent so much money out to people that the banks themselves were in major debt. This money could have been used to stimulate the economy! The banks should also be blamed because if you think about it, raising the interest rates only slow down the economy; therefore, reducing the number of people buying products, and if anything, high interest rates just make it longer for people to pay off their loans, possibly making the banks poorer because they lent even MORE money. The banks are definitely looking after their well-beings, but they should come up with a better way to provide benefits for both themselves, and the economy.
I agree with you, Alex, that the banks should not be the blame for the economy’s fall. I do think that the bank’s idea of taking this opportunity to raise the loan’s interests is not too great at all. People are having trouble acquiring the money, so that is why they go to the bank for a loan. With higher interests now, it is just making it even harder for the people, having them to pay more back. I do agree with Chris though, the government needs to start taking action in figuring out ways to help out in this big financial crisis.
I also agree that the bank should not be blamed for the economy downfall. As Alex said, it is reasonable for the bank to try to make a profit, so they are correct to try to prevent a net loss. However, I think that there are two perspectives for everything. I agree that the high interest rates are making it very hard for the people to pay back loans, but I also think that it is somewhat necessary for the banks to keep the rates high. With the economy falling, the risk that people will not be able to repay their loans is greater; therefore the high interest will allow the bank to get money back. Also, the banks currently have a limited amount of money, so they need to be careful to make sure they do not suffer a net loss.
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