The importance of banks in U.S. Essay

Executive Summary

The research studies the importance of the service industry on the economy of the United States particular attention to the banking industry. The role of the banking industry in the economy has been explained as well as the challenges currently facing the industry. A brief analysis of the failure of the banking industry in the recent global economic crisis has been assessed. The study involved all the stakeholders in the banking sector to collect data. The data was collected through the use of questionnaires and analyzed using the SPSS version 14 computer package. The conclusion of the research provides that the banking industry has been of great importance; but has contributed to several economic problems. Lastly, the researcher recommends that the U.S. government should improve its regulatory measures upon the activities of the banking industry.

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Introduction

Economists suggest that the products produced in an economy can be divided into tow: goods and services. The goods are the tangible products while the services are intangible. The service industry has grown tremendously in the economy of U.S. the banking sector is one of the sectors in the service industry which provides the services of money transfer, providing loans, consultancy among others. The mission of the industry is to promote monetary services in the economy for a vibrant economic growth in U.S. the goals of the industry is to ensure profitability of all sectors of the economy, promote transfer of funds and others. The federal government has regulated the banking industry to ensure the activities of the sector do not harm the economy. The banking sector plays a major role in the development and growth of the economy (Labs, 2010).

Statement of the Problem

The banking industry has been of great importance to the economy of the United States

Methodology

Subjects

             The population of the survey included all stakeholders in the banking sector. A sample of ten banks was used and the research was focused on the bank employees, managers and their customers. Ten bank managers were surveyed; a hundred bank employees and one hundred and ten bank customers holding various bank accounts with the banks were also researched about their views on the importance of the banking industry to them.

Instruments

            The survey mainly used questionnaires to collect data. The data collected was processed using SPSS version 14. The questions in the questionnaires had been framed such that qualitative data was converted into quantitative data by the use of scales in answering the questions.

Procedure

            The researchers liaised with bank managers to identify the banks which were willing to participate in the research. The Questionnaires were distributed to the sampled banks by the research assistants. The participants were left with the questionnaires for a period of two weeks. The research assistants then collected the questionnaires for the analysis process. Participation in the research by the various bank stakeholders was voluntary to reduce the costs of collecting data.

Limitation of the study

            Not all the participants were literate to use the questionnaires for the provision of reliable data.  Most of the bank managers were not willing to provide data about their internal activities since they feared revealing some business secrets to their competitors. In addition, the data collected may have been biased since not all respondents might have provided the actual data about their banking activities.

Findings

The banking industry has been of great importance to the economy of U.S. the industry provides employment to a large population of people. The banks provide employment directly and indirectly to many people; hence, it has improved the incomes of these people. When the incomes of the people increase, their living standards improve and poverty reduces. The banking sector has contributed to the economy of the country through payment of corporate taxes, enhancing foreign monetary transfer, issuing loans to investors, and others. The international trade has been made easier by the expansion of the banking sector. People can transfer their money across the bounders more easily with the establishment of international money transfer services (Porteous & Pradip, 2005).

            The banking industry has been in existence for a long period of time and many people have found it difficult to operate economic activities without the existence of banks. The federal government has regulated the banking industry for a long period to avoid financial crisis related to the transfer of money (Hoggson, 1926).

            However, the banking industry is to blame for the 2007-2009 economic meltdown. The economic crisis happened when the banks in U.S. issued unsecured loans to many subprime mortgage borrowers. Subprime mortgages are policies which have a high risk of default. Subprime borrowers are the people with low incomes and have a poor credit history. They have higher risk of default compared to the prime borrowers. The US government deregulated the real estate mortgages leading to massive investment in subprime mortgages. This resulted into the risky lending activity of subprime mortgages.  The subprime mortgages were not popular initially but they became widely used in the 1990s. The climax of the sub prime mortgages was in 2006 when they accounted for more than 21 percent of all mortgages traded in the US market. The value of subprime mortgages in 2006 was valued at $600 billion. Many subprime mortgage intermediaries were established to reap the benefits of the expanding industry (Helleiner, 2009).

The banking sector was the worse hit by the crisis. Inter-bank lending declined and banks had no money to issue to their customers. Most of the banks collapsed while others registered huge losses. This was as a result of failure by many subprime mortgage intermediaries which defaulted the huge loans they had acquired from the banks. The central bank could not lead to all the banks due to the massive crisis that affected the entire country. Since US is a market for many commodities from other countries there was an extension of the crisis to other economies causing a global economic meltdown. Many economies declined since they had no market for their goods. Inflation increased as prices persistently increased. The entire world encountered economic crisis which resulted into failure by all sectors of the economy in the world (Stephen, 2008).

Conclusions

            The banking sector has played a major role in promoting economic growth and development in U.S. the industry has supported almost all other sectors of the economy. The provision of financial transfer and the regulation of the markets have been possible by the use of the banking services. The economy of U.S. has been very successful due to the good banking industry. The living standards of the people have improved due to the vibrant banking industry. However, the industry has caused failure many other industries and to the entire economy due to poor banking practices. The subprime mortgage sector has failed due to poor lending activities of the banks in U.S. the banking crisis in U.S. spread to other economies and the entire world suffered great losses after the failure of the global markets.

Recommendations

            The federal government should regulate the banking sector to avoid any future misconduct in the industry. Laws should be amended to accommodate the changes in the economy to allow all the bank institutions comply with the required ethics. The bank managers should conduct ethical and professional banking practices to prevent the poor lending activities which might harm the entire economy.

References

Boland, Vincent (2009-06-12). “Modern dilemma for world’s oldest bank”. Financial Times. http://www.ft.com/cms/s/0/a034542e-5771-11de-8c47-00144feabdc0.html?nclick_check=1. Retrieved 23 February 2010.

Hoggson, N. F. (1926) Banking Through the Ages, New York, Dodd, Mead & Company.

Labs, Stanley. (2010). Service Industry. Retrieved 10 May 2010, from;

<http://www.economywatch.com/business-and-economy/us-service-industry.html>

Porteous, Bruce T. & Pradip, Tapadar (December 2005). Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates. Palgrave Macmillan. ISBN 1-4039-3608-0.

Stephen, T. 2008. “Financial Meltdown Is Top Story of the Year”. Manila Bulletin. Dec 27.

Stapledon, N. 2009, “Housing and the Global Financial Crisis: US versus Australia”. Economic and Labor Relations Review. July. Volume: 19. Issue: