Essay on the Implications of Capital Markets

Large banks in any economy enjoy certain competitive advantages over the small banks. Some of the benefits that the large banks have included being able to offer low-interest rates on the money market deposit accounts and receive a discounted option on the uncertain deposits. Also, the large banks have an advantage of being opted when it comes to receiving low premiums on the risky products. Many researchers have omitted the essence of deposits, which are crucial in determining the size of a bank, and majored in comparison of bond prices (Jacewitz & Pogach 2016 p.2). Money markets deposit accounts are essential in providing a reliable source of funding for commercial banks. Most of these deposit accounts are insured against a major economic crisis that may occur.

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The money markets deposit accounts are faced with various statutory restrictions which make them homogenous across deposit minimums (Jacewitz &Pogach 2016 p. 11). For example, to make a withdrawal from these deposits, the bank needs to provide a written notice one week before the withdrawal. Also, the money markets deposit accounts necessitate a maximum of six transactions per month. These standards apply to the small and large commercial banks (Jacewitz & Pogach 2016 p.12). In many banks, there is the prevalence of high thresholds attributed to the money market deposit accounts. However, some differences are exhibited between the money market deposits of these banks, but the variance is insignificant. The larger banks have higher reserves compared to the small banks and therefore, the effect of shifts in prices will have a greater impact on the smaller banks than in, the larger reserve banks.

A dynamic and advanced capital market contributes significantly to the economic growth of a country. Financial markets are supposed to provide systems that enable mobilization of funds from the people and use them for investing in productive channels and activation of untapped resources. Also, the capital market systems are responsible for the formulation of capital resources in the economy. Capital resources-formulation is the increment made on the existing capital resources of a country. The financial markets comprise of debt markets and equity. These provide a proper channel in raising long-term financing needs by pooling foreign investors who have a long-term investment perception (James 2015 p.81). By increasing the number of investors in the country, there are visible developments that are observed in the economy. Without a robust capital market, the means of accessing resources for investment would be limited.

In the modern economy, development relies on the ability of the financial markets to maximize local resources as well as foreign investments. Failure to have large and efficient banks within the economy results to the derailment in the number of productive projects. In the malfunctioning capital markets, trading becomes expensive since the markets are illiquid and fail to attract foreign investors (Bekaert & Harvey 1998 p.2). An economy that constrains capital markets imposes economic disadvantages on the local firms which make it difficult for them to compete in the international market. Operators are likely to favor the large banks about the smaller banks since they have a lower risk potential. While the small banks are subject to government restrictions, the capital market advantage of the large banks places them at a level that government influence is relatively lower (Jacewitz & Pogach 2016 p.26). In conclusion, it is evident that financial markets are necessary for the growth and development of an economy.

Reference List

Bekaert, G. and Harvey, C.R., 1998. Capital markets: An engine for economic growth. The Brown Journal of World Affairs, 5(1), pp.33-53.

Jacewitz, S. and Pogach, J., 2016. Deposit rate advantages at the largest banks. FDIC Division of Insurance Research Paper.

James, J.A., 2015. Money and capital markets in postbellum America. Princeton University Press.