Profitability in the Banking Sector Mathematics & Economics Essay (Essay Sample)

Profitability in the Banking Sector
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Introduction
The Australian banking industry is the largest sector in the country’s financial system as it holds an estimated 55 percent of the financial institutions’ assets (PwC, 2019). As at 2017, the banking sector comprised of 174 deposit-taking institutions regulated by the various entities, including the Reserve Bank of Australia (RBA), the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) (RBA, 2019). Despite the numerous challenges facing the sector such as competition, cost effectiveness, changing consumer expectations on risk and conduct, and future growth constraints, banks have in recent years posted record financial results. Housing loans coupled with negligible credit losses and customer loyalty has been attributed to the high profits for the banks. The paper applies neoclassical and Marxian economics to evaluate how banks earn profits.
What is Profit?
A bank’s financial statements are fundamentally different from those of most companies due to the business model applied (He, 2016). For instance, the financial reports do not have inventory or accounts receivable entries to measure sales performance. Usually, banks take in customer deposits, which they pay a certain interest on various accounts. In return, the deposits are invested in different securities or lend to clients, including companies, small businesses, and individuals as short- or long-term loans (Richardson, 2012). The banks make a profit from the interest spread earned from the interest income paid by consumers who borrow the loans and the interest expense paid to customers for their deposits. Besides, banks earn interest from the cash invested in securities such as Treasury bonds and bills. Other sources of income include ATM fees, overdraft fees, credit cards fees and interest, and wealth management advice fees. A bank’s primary business involves effectively managing the spread in deposits and interest rates received and payable to consumers to generate income. Therefore, the size of interest rate spread significantly determines profit earned by a bank.