Term Paper on "Services Sector"

Term Paper 13 pages (4816 words) Sources: 13 Style: Harvard

[EXCERPT] . . . .

Services sector comprises vast groups of industries that cater to human needs in all spheres of existence. In this paper, we shall deal with the banking sector which falls under the field of services. The Banking sector relates to the financial transaction requirements of the people and nations and even international monetary transactions.

Nature of Banking Services

The financial service sector comprise of banks, non-banking institutions and lending and other finance related operations like mutual funds and investment companies. Within the industry, Banking is a vast and very highly developed institution that functions on complex hierarchies and with special controls and laws. Banking serves the nation, individuals and business. The Banking industry can be defined in terms of the product, markets and the type of competition and services. Banking can be classified as a 'financial intermediary' service. Banks accept money from depositors and lend it to the applicants and the difference in interest and service charges between the depositor and the borrower is the net gain of the bank. The banks if viewed as mere agents of transforming funds while true on a policy and economic analysis are not the exact reflection of the industry. (Duetsch, 2002, p. 174)

Banks provide necessary financial services to households, individuals, and businesses. The operations are through multiple services like deposits, accounts loans and investment services provide the customers of the bank with multiple financial and commercial services at designated and regulated charges. The service is regional. Banks themselves fall under a wider classification namely the "financial services industry" which also contain the investment banks, security and share trade concerns, depositories and may allied services which may be coupled with banking services by banks or may themselves be individually carried on as a service by one institution. Though all the firms that serve the people in various ways in the financial arena, unless the core banking services, that is the deposit and loan services and the transfer of negotiable instruments like checks are provided, the institution is classified as 'non-banking financial institution'. (Duetsch, 2002, p. 174) the banking service consists of a "cluster of products and services" as defined by the U.S. Supreme Court. They offer sets of services that other financial institutions cannot provide. (Duetsch, 2002, p. 174)

The types of services are based on agreements like banking service agreements which define the relationships of factors in the banking service. Lockbox agreements deal with the safety of deposits, valuables and handling of public funds. Two financial institutions also enter in to agreements called collateral agreements to regulate their internal working mechanisms to synchronize the working with each other. The trust and escrow agreements are today important in international transfers and import or export where the banks act as escrows. (Sheimo, 1993, p.1) Recently the technology advance has brought in the wire transfer method where funds are transferred online and banks provide this service to customers who wish to pay quickly without the usual clearing of checks. Wire transfer agreements have inherent risks to the bank as against the traditional methods of fund transfer. (Sheimo, 1993, p. 6)

Credit is one of the most important features of the banking industry. Credit by itself is like a currency. It is given when needed aiding capital formation. Checks and drafts and other negotiable instruments are also a form of currency created and managed by banks. All these services create the necessary cash flow in the economy. The volume of transactions in these spheres outnumbers those of actual currency dealings which show the importance of this industry to the economy. Credit accounts for a large volume of transactions and make the base for the banking sector. Any monetary problem or analysis of monetary theory thus begins from banks. Capital is very important for any business, and it is important for the banking business too. The larger reserve a bank can muster, the greater is the scope of its operations, and the profits will be in proportion. The larger capital that the bank can muster will essentially attract the better type of investors thereby creating a fund and cash flow for it. The success of the bank is determined by the type of society it serves. (Philips, 1920, p. 121)

The Reserve System & the Central Bank

The Second World War also ended with a deep mistrust of monetary policies and the governments began relying more on taxation and fiscal policies. Fiscal policies also dictated that the central banks ought to play a pivotal role in stabilizing the economy. Economic policies, it was perceived could only be implemented through the central bank of the country. This is more so where the exchange rate is concerned. When in the 1990s price stability was considered to be important, the role of monetary policy and the effect of banking policy on controlling prices came to be recognized. Thus today apart from being the lender of the last resort, the Central Bank of the country also plays a vital role in enforcing economic controls. (Siklos, 2002, p. 1) the unique feature of the banking industry is the reserve system and the central bank of the country. The reserve system is by itself is an institution that has come about not only to assure the depositors of the soundness of the bank, but also keep the economy stable. The Banking and trade deficits are affected by the reserve system. The central banking policy determines the trade deficit of a country. The reserve system and the functioning of the central bank must therefore be considered as a special subject. (Ashdown, 2002, p. 55)

All domestic and foreign policies and activities of the economy and governments are financed by banking institutions. The banks have also become dependent on the stock markets and the mutual dependence has to some extent caused instability. The governments therefore have controls and checks on the reserves of the banks, and the lending rate to offset the fluctuations of the market. In all countries there is such a reserve system controlled by the country's central bank. The U.S. Federal Reserve System was created to control the flow of credit and currency within the country to provide stability. The central bank acts as the lender to banks and thus covers their deficits when required. This keeps the banks liquid and the faith of the investor is not shaken. It also avoids major economic catastrophes. The functions performed by the banks are today the basis of the world's trading system. Banks of the country and how they function will show the nature of the economy and trade. Once gold was used as bullion and therefore it was used to create overseas credit. The reserve system replaced the gold standard and currency trade is in vogue. Central banks still deal in gold for their countries. (Ashdown, 2002, p. 27)

The central bank, from its role of being the lender of the last resort has enlarged its role to being the creator of price stability and controlling fluctuations in the economy. Monetary policy came to have importance after the industrialization of the country took place. However the changing financial situation and the new financial instruments that are being created on account of introduction of technology will in course of time weaken its ability to control the economy. The central bank too thus is in need of adapting policy and redefining its role in the changing banking scenario. (Siklos, 2002, p. 1) Though globalization and the liberalization of banking has in essence diminished the monetary policy power of the Central bank, in most countries the central bank or as in the case of Japan the ministry of finance controls the banking sector. Especially after the disaster of the bubble economy burst, monitoring and controlling banks has again become a serious issue, and the central bank is again in the saddle. (Osano; Tachibanaki, 2001, p. 85)

Modern Banking

Modern banking is a new and evolving concept with the requirement of additional controls and laws. Banks are redefining their services, and therefore the regulations and laws have to be expanded to suit the new banking activities. The banking laws are now a part of the banking system and have evolved with the changes in the nature of banking. Banking service is so complex that we have to view it as the internal structure and operation of the bank and the relation of the bank and its legal framework with external dealings. Today banks still perform the basic functions for which they were created, namely lending and collecting deposits. (Cranston, 1997, p. 3)

The core banking structure has not changed, but the method of operation has. The functions of the banks have gone beyond the traditional service, banks serve the customers in more ways, like providing for other financial products, creation and disseminating financial information which cannot be said to be a part of the core banking. The customers are becoming affluent and look to banks for help in their financial decisions. Thus money which would have been merely… READ MORE

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