CLOZE TEST IN IBPS CLERK CWE ============================ Banks are the heart economy and provide an easy link between savers and borrowers: granting loans to those with the ideas and ambition to use them while at the same time providing peace of mind to squirrels who want to lock their cash away safely. Yet banks have a dark side too: they exist to manage risk, but often simply stockpile it. When they go bad they scythe away wealth and strangle economies. To see why banks are so vital, start with the finances of a typical household or firm. Their debts mainly mortgages on homes, offices or factories have fixed terms; they often have fixed interest rates too. In what is owed there is a lot of certainty. But firms’ and families’ financial assets are not bound by such rigid terms: deposits can be withdrawn with little notice, bonds and equity can be sold quickly if cash is needed or if investment tastes change. This combination of fixed-term debts and flexible assets is a comfortable set-up. But one party’s asset is another liability. This means that corporate and personal finances have a mirror image in the balance-sheets of banks, where assets cannot be adjusted but where debts can be called in overnight. That mix is risky: a rush of depositors demanding their money back can force cut-price asset sales. If debts are called in more quickly than assets can be sold, insolvency looms. Managing that risk is what banks do: by holding a risky balance-sheet they allow households and firms to have safe ones.
Posted on: Sat, 20 Dec 2014 12:46:53 +0000
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