Day 72 Commercial bank, vulnerable group?

Commercial bank, vulnerable group?

At toady’s China National People’s Congress, the vice-president of China Construction Bank claimed that commercial bank is disadvantage groups in the financial reform. So he implied that government policy should be more skewed towards commercial bank during the interest rate liberalization. His statement made the whole conference hall laughed, including vice-prime minister Li Ke Qiang. In order to understand why commercial banks are not generally considered as the vulnerable group, we must comprehend the function of the bank.

The commercial bank has several functions in the financial system. The most common and important one is the credit intermediary function. The commercial bank obtains funds from the surplus units in an economy and supplies them to the deficit units. It is the fundamental utility of the bank, which enables the macroeconomic adjustment of economy structure, investment and consumption ratio and industrial framework. Especially in China, where the government implements credit policy to maintain the economy stability  via the adjustment of interest rate, credit scale and capital investment. In addition, the commercial bank possesses the settlement of transaction function. As a deposit taking facility, the commercial bank allows the both individual and organizational clients to utilize the deposit to perform clearing, settlement or other related activities. The bank acts as an agent between both parties, and provides cheque as the instrument to settle transactions. It profoundly reduces the circulation expenses as well as the cost of funds for the bank itself. Furthermore, the commercial bank’s most significant function is the credit creation. The bank increases the money supply in the economy through turning deposits into loans. For instance, if the bank lends the amount X to client A, then A will generally use the fund to invest. Therefore, the money will be circulating in the economy and eventually deposited back into the bank. As a result, bank will create another loan toward client B using the fund X once again. Obviously, the bank generates the money supply more than the original amount X in this process. Moreover, the advantage of communication and sufficient information enables the commercial bank to provide financial services. The computerizing systems established for the credit and settlement intermediary function are used in financial consultation, financial leasing and other services.  

These functions grant the commercial bank immense source of funds, where money equals to power in the financial market. Hence in any extent, it would be  a unanimously cogent conclusion that commercial bank has never been the vulnerable group.