Bank Growth Strategy
- A prime strategy for growth includes acquisition of smaller banks. Economic downturns provide large banks with ample opportunities to merge and acquire financially unstable institutions. Gerard Caprio and Dimitri Vittas, authors of the book, "Reforming Financial Systems," explain that unprecedented levels of bank consolidation occurred during the Depression of the 1930s because of concern over fragile, weakened banks. Furthermore, the Federal Deposit Insurance Corporation's list of failed banks as a result of the mortgage meltdown in 2008 reveals all but a handful of banks were acquired by other financial institutions. Thus, most collapsed banks do not disappear. Instead, they contribute to the growth of larger institutions.
- Despite their negative reputation during the financial crisis of 2008, banks make inordinate amounts of profits from derivatives. A 2010 New York Times article reported that banks do not have to report profits from their derivative trading activities so the specific earnings figures are unknown. However, banks keep the difference between what the buyer purchases for a contract and the price of what the seller pays. In some cases, this amount could be $5 or $50,000 per contract. These deals multiplied across the voluminous trading activities result in extensive earnings.
- Banks expand operations by tapping into overseas markets and investing in the foreign exchange markets. Jeff Madura, author of "Financial Markets and Institutions," explains that mergers with foreign banks are a way to tap into two consumer bases. Madura cites the formation of the European Union as a reason for the heightened competition between global investment firms. Banks also earn money from trading foreign currency on the Forex market. As of April 2010, The New York Federal Reserve reported the daily volume of the foreign exchange market at $754 billion. Financial institutions cause most of this activity.
- A bank's growth strategy is contingent on people using its financial services, including checking accounts, credit cards, mortgage loans, auto loans, savings accounts and mutual funds. Without consumers giving their deposits to banks, the institution cannot loan out money up to 10 times the amount. Thus, if banks do not have a steady stream of deposits, they are unable to grow. Banks also earn money from the interest, overdraft fees and late fees charged to consumers.