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

Cost of Financial mediation - Essay ExampleThe general view among experts in this field is that if administrative authorities are in favor of competition, it pull up stakes caterpillar track to the presence of larger number of players in the swaning sphere that would automatically lead to lower margin rates as competing bankers will vie with each other to attract customers, and will automatically have to become efficient in their functioning in order to stay afloat(predicate) in such highly competitive environment. So, the economy as a whole would be able to enjoy efficient banking services coupled with comparatively affordable bank rates. However, if doorway in banking sector is strictly regulated, it would result in less competition and might also lead to lesser ability 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 alone to approach these few bankers f or finance. It must be repeated, however, that these statutory regulations differ so widely between countries and regions that the just plausible method of measuring the impact of such biases and restrictions on bank rates and efficiency would be to consider each instance individually and comparing it with the larger and more generic backdrop of pecuniary efficiency. (Demirg-Kunt, Laeven and Levine)Impact of enlighten lodge in margin and overhead expenditures on Cost of mediation 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 be to its depositors. The exact measure of net interest margin is obtained by dividing the difference between a banks interest earning and interest expenditure by the volume of interest bearing assets. The net interest margin so is related to the traditional functions of banking industry - accepting deposits at lower interest rates and lending them at higher rates of interest.The overhead 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 subject 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 pointedness of freedom of entry or exit is, quite obviously, determined by the statutory or impartiality 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 co mpetition in the banking sector, there are other equally chief(prenominal) issues that determine the ability of the commercial banks to offer credit to potential