Saturday, May 02, 2009

Banks Are No Charity

I fail to understand this news titled "banks put profit at the front-seat, or banks are more keen to seek profit" --or something like that.

First off, what is wrong with that? Banks are profit maximizer, for sure. But if you think borrowing from the bank is pricey, you are free to seek another (cheaper) source (if any) --your own retained earning, for example.

Second, on why the gap between deposit and lending rate widened lately, perhaps Bernanke and Gertler in their classic article Agency Costs, Net Worth, and Business Fluctuations (AER, Vol. 79, No. 1, Mar.1989, pp. 14-31) might help. From borrower's balance sheet approach, they demonstrate that lower net worth increases agency cost (hence higher lending rate) and business downturn decreases net worth.

I haven't look up the data on the borrowers' (households and firms) net worth, but certainly in the last quarter we have been, at least perceived, at business downturn, no?

On the other (good) side, people still go to bank to borrow despite high lending rate. So perhaps, the demand --some would say real sector-- is still strong, or at least not as weak as we may think.

I am neither monetary or finance specialist, but has anyone had better idea?


  1. Jal, maybe we could also suggest Kompas-Gramedia group to not concentrating on their profits. Instead, cut their retail and subscription prices; also their book and stationary prices.

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