Thursday 4 September 2008

A bank's dilemma

When interest rates rise, profits go up like magic. When they fall, however, shareholders will be unhappy if profits fall in accord, so profits must remain always on the rise. But you'll start losing customers if you don't lower your interest rates, because other banks will do so at some point. You need to lower your rates to get new customers and retain your current ones, but you need to maintain profits to keep your shareholders happy.

Mokalus of Borg

PS - It's possible this problem has no easy answer.
PPS - Unsustainable profits one year means unhappy shareholders the next.

2 comments:

Anonymous said...

Bank's Dilemma, more like a social/moral dilemma.

Why does the public, manifested as shareholders, believe they have a right to a return every single year. More importantly why does this return need to get bigger and bigger.

Perhaps everyone needs a reminder that investing is a GAMBLE and as such you can not reasonably expect an effervescent return.

John said...

Indeed. As a society, we really went all-out embracing the concept of greed.