What is Cost of Equity? – Meaning, Concept and Formula
Theoretical Concept The cost of equity concept is very important when it comes to valuing shares on the stock market. Equity, like all other investment classes expects a compensation to be paid to its investors. The problem however is that unlike debt and other classes the cost of equity is never really straightforward. You can…
Cross Border Credit Reporting
The geographical boundaries drawn by nation states are blurring in the 21st century. In many parts of the world, free movement of goods, services, and even personnel have become a norm. However, strangely, the concept of credit and loans is still dependent upon national boundaries. The H1B visa system of America is a testimony to…
The Consequences of Negative Interest Rates
Warren Buffet once told that interest rates are like gravity. If there is no gravitational pull on asset values, then values can be infinite. Little did Warren Buffet know that the world is heading towards a strange phenomenon called negative interest rates. This strange new world is both confusing and counter-intuitive. The common man is…
With the world economy being integrated and interconnected due to the process of globalization, the geography of banking has assumed a different dimension altogether. Gone are the days when customers had to visit the branch physically to deposit and withdraw money. Instead nowadays, customers can transact their business in a variety of ways which diminishes the role of geography or the “power of the place”. However, the recent global economic crisis has served to highlight the perils of financial integration as the crisis which started due to the bottoming of the housing market in the United States affected the whole world due to the geography independent nature of the financial products like CDO’s and Derivatives.
The basic functions of banks are to borrow and lend money. This is done at various locations and there is no constraint that both have to be done at the same location though traditionally, this was the way in which banking was conceived. It can be said that banks in the United States were dispersed though there were “clusters” of “financial centers” like New York and Chicago that were the hubs of financial activity like investment banking and the trade in derivatives.
Money flows in and out of banks due to the various functions that the banks undertake. These can be in the nature of deposits, loans, exotic financial products, corporate and investment banking etc. All these functions ultimately rest on the bottom line functions of borrowing and lending.
The way in which money flows in and out of banks is by nature of investment (money flowing into the bank), and by nature of loans (money flowing out of the bank). If a bank is located in a specific region, it is more likely to contribute to the economy of that region as the transactions made by the bank and the financial flows therein impact the regional economy. However, there is a national dimension to the financial flows as well as is evident from the fact that banks do business beyond the local region and hence they benefit both the regional and national economies.
Finance is the “lifeline” of any economy and hence the practice of banking, by enabling financial flows contributes to the growth of regions and countries by way of lending and borrowing that makes the economies grow. The practice of “fiat banking” is the source of growth in the current economic paradigm and this enables the money to “grow” thereby contributing to the growth of the region as well as the country in which the bank operates. As mentioned earlier, the location does influence the way in which banking operates and hence it can be said to differ from place to place though in recent times, banking has become largely independent of geography.
In conclusion, it is inconceivable to think of economic growth without banking and though in recent times, banking has become largely independent of geography, in times of “bank runs”, geography still matters. The point to note is that banking and geography are still inextricably linked when one considers the need for physical proximity in conducting financial transactions particularly from the point of view of regulation and oversight. Hence, it is by no means conclusive that banking is independent of geography though occasionally we tend to think otherwise.
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