Question

Why have banks been losing income advantages on their assets in recent years?

Short answer

Banks have been losing income advantages on their assets because of:

• Securitization, numerous other monetary institutions are loaning to business firms.
• Further, Commercial paper and bonds are generally the sought-after modes of subsidizing venture.
• Moreover, the Basel standard has forced conditionalities on the operation of banks.

Step-by-step solution

Concept Introduction

The banking sector refers to the business of providing consumers and businesses with a variety of banking and financial services. This is mostly a service industry, with the core functions of providing loans, accepting deposits, and funding other businesses. The banking industry is governed by a number of laws.

If the income earned from a particular service is greater than the income earned on that particular service, the income advantage is earned. The financial advantage can be obtained by effectively utilising resources.

Explanation

The following are the reasons why banks have been losing earning advantages on their assets in recent years:

The collapse of the sub-prime mortgage industry left banks at a disadvantage in compared to their competitors. This is due to the fact that regulators mandate them to re-finance sub-prime mortgages on conditions that are not beneficial to the banks. The banks will have to give up the advantages they had earned from the income generated by their holdings.

By removing some of the risk from the loans, securitization has enabled other financial institutions to originate loans. When other financial institutions participate in this industry, the bank's assets are depleted, and the bank loses money.