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Commercial and Investment Banking - Essay Example

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The essay “Commercial and Investment Banking” will analyze various advantages as well as disadvantages of relationship lending. With alterations in the competitive circumstances surrounding an organization, the lending relationships alter as well…
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Commercial and Investment Banking
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Commercial and Investment Banking

Lending relationships, particularly those that are long-term associations make it simpler for small sized organizations to have access to outside funds. Owing to the risky nature of the small firms, it becomes very difficult for them to borrow funds if they lack lending relationships with banks. However, such kind of organizations predictably attempts to get access to further diversified sources of funds, after they have formed long-term lending associations with banks. Thus, it can be stated that the organization’s preceding lending association with a bank enables it to gain admission to the public securities market. Furthermore, the association of the organization with a bank persists to play a crucial role even when the organization is capable of issuing public securities. Nonetheless, when an organization diversifies its sources of funds, it has to face certain consequential drawbacks. The funding diversification restricts the bank’s readiness to assist the organization when it faces financial distress. This restriction in the bank’s flexibility is true even when the organization had taken up only diminutive values of public debt. In spite of everything, it can be conclusively stated that a good lending relationship with a bank augments the probability of fruitful negotiation when an organization encounters financial difficulties (Berlin, 1996). Answer 2 a) Kwan (2004) defines a large bank merger as the amalgamation of the operations of two banks, which are huge in size and the merger provides a large geographic scope to the subsequently merged institute. In the recent years, the large bank mergers have been an indication of the process for creating an extensive nationwide banking franchise. b) The regulatory modifications in the 1990’s have created immense opportunities for the banks to pursue the overseas economies. The banks have benefitted in terms of economies of scale as well as scope. Mergers have enabled the banks to provide the number of products and services and as a result, the unit price of production has reduced. Additionally, the expansion had created a circumstance where the shared expenses of providing two corresponding services are not more than the joint expenses of providing the two services separately. c) It is believed that mergers can increase the bank’s capability to diversify risk. Prior studies have implied that geographic spreading out would offer diversification advantages to a banking organization. This can be accomplished in the form decreased portfolio risk on the asset side, in addition to a decline in the funding risk on the liability side. Banks are likely to attain these benefits as it spreads funding actions over a wider geographic region. Furthermore, studies have also indicated that product extension could result in diversification benefits. The benefits would be more distinguished amid the banking as well as the securities activities, while it would be less prominent in the activities between banking and insurance (Kwan & Laderman, 1999). ... Read More
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