Cost of Financial Intermediation Essay Example | Topics and Well Written Essays - 3000 words

Cost of Financial Intermediation - Essay ExampleThe general view among experts in this playing area is that if administrative authorities are in favor of competition, it will lead to the presence of larger number of players in the banking sector that would automatically lead to g commence bank rates as competing bankers will vie with each other to attract customers, and will automatically have to become efficient in their surgical operation in order to stay afloat in such highly competitive environment. So, the economy as a whole would be able to enthrall efficient banking services coupled with comparatively affordable bank rates. However, if entry in banking sector is strictly regulated, it would result in less competition and readiness also lead to lesser efficiency and almost certainly higher bank rates as the few banks that would be operating in the finance sector would remain assured of clients as the latter would have no option but to approach these few bankers for finance . It must be repeated, however, that these statutory regulations resist so widely between countries and regions that the only plausible method of measuring the impact of such biases and restrictions on bank rates and efficiency would be to ingest each instance individually and comparing it with the larger and more generic backdrop of financial efficiency. (Demirg-Kunt, Laeven and Levine)Impact of net beguile margin and operating expense expenditures on Cost of intermediation Cost of intermediation is substantially impacted by net interest margin and it would be worthwhile to study in a little more detail as to the exact characteristics and features of net interest margin. Put simply, the net interest margin signifies the income of banks and it consists of the interest a bank earns by lending money to borrowers and the interest it has to pay to its depositors. The exact measure of net interest margin is obtained by dividing the difference between a banks interest earning and inte rest expenditure by the volume of interest bearing assets. The net interest margin thus is related to the traditional functions of banking industry - accepting deposits at lower interest rates and lending them at higher rates of interest.The belt expenditure ratio of a bank is calculated by dividing bank overhead costs by the total assets of the bank. It is but obvious that the more inefficient a bank the higher would be its overhead expenditure ratio. But overhead expenditures are not only dependent on pure operational efficiency of a bank. It also depends on the prevailing market regulations and freedom or otherwise for players to leave or enter the banking sector as and when the desire to do it arises. The degree of freedom of entry or buy the farm is, quite obviously, contumacious by the statutory or law enacting authorities of the country. It might be worthwhile to mention at this juncture that though freedom of entry and exit primarily determines the extent of competition i n the banking sector, there are other equally important issues that determine the ability of the commercial banks to offer credit to authority