FINANCE

Finance

[Name of the Institute]Traditional Banking and Risks

Introduction

The large needs heavy amount of investments in order to run their business operation and these heavy investments is supplied through banks or financial intermediaries on short duration. It means banks or the financial institutions are essential and play a significant role in current as well as previous era. The following paper will briefly describes the two phases of banking system, i.e. traditional bank in which only deposits are accepted from the customer and then created the assets from these deposits along with the modern era in which large amount of different activities are provided for their customers.

Traditional Banking

In the traditional banking system, any account in the bank can be opened by the customer, along with taking the facility for saving the money by depositing the money in the local bank. The money can be with drawn from the checks, bank draft and through the counter payment. The customer can also ask to resolve the issue with the manager and also can take help for the loan from the bank. However, as compared with the modern banking system the traditional bank is simple (Wagner, 2012, p.187-210). Furthermore, the bank is also called as the financial intermediaries and the common functions played by it are as follows.

The traditional banks played the role as the depository institutions which means the check and the deposit of money are maintained by the bank.

The loans that is issued by the traditional banks was in the basis of small terms and the conditions (Lozano, 2010, p.1436-1449).

Recession

Recession is basically an economic term or the business cycle contraction. It generally shows the slowdown in the economic activity. The indicators of the macroeconomics for instance the gross domestic product (GDP), utilization of capacity, investment spending, business profits, house hold income, fall of inflation, on the contrary the bankruptcies and the rate of unemployment increases (Saez, 2013, p.1-8). When the unemployment is high then the activity of recession starts. When the unemployment increases then it will also affect the standard of the common people that will also decreases the demand of the product. If there is increase in the demand then the rate of inflation also increases on the other hand the economic growth decreases. This leads to the decrease in the gross domestic product rate which leads to the depression (Auerbach,2011).

Source: http://www.economicshelp.org/blog/3806/economics/euro-economic-recession

The above graph represents the recession as in the year 2007, i.e. the period of global recession has affected badly the businesses globally. The red line represents the contraction in which the economy of the firm has decreased (Larrimore, 2013).

Exposure to Risks

There are two roles played by the traditional banks i.e. issuing the money and the deposits. Although the operations for such banking system has increased that leads to the negative results for the banks (Mozaffarian, 2011, p.1116-1125). Furthermore, high risk has been exposed because of the negative impact in the banking operations. The risk includes the credit risk, reputation risk, market risk, legal and the liquidity risk etc (Bessis, ...