Principles of banking operations

Davcev, Ljupco and Davcev, Aleksandar and Mitreva, Mila (2024) Principles of banking operations. Knowledge International Journal, 63 (1). pp. 85-90. ISSN 2545-4439

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Abstract

Banks work to achieve: profitability, liquidity and reliability. The stated objectives of banking operations are identical to the objectives of all other business entities. Liquidity and security are more emphasized in banking than in other entities, only because of the specificity and general importance of banking activity. A bank is a business entity that produces a banking product, aimed at the market, in order to achieve an appropriate rate of profitability, with adequate liquidity and business reliability. The relationships of profitability, liquidity and reliability in banking operations are not mutually harmonious but inharmonious, which means that they are negatively correlated with each other, which is almost never absolutely linear. Like every factor of production in the economy, the funds placed by the banks in credit loan have their own price. The same price is the interest rate that banks pay on all sources of financing. When a greater part of the assets of the banks, for which the bank pays an interest rate to the financing sources, will remain uninvested, it will increase the liquidity. The greater liquidity of the banks will undoubtedly lead to a lower rate of profitability, having in mind the fact that a greater part of the liquid assets of the banks will remain without placement. If the majority of the liquid assets of the bank are placed in credit loans, the profitability of the bank will be higher. Banks are faced with clearly defined criteria which credit loans they can approve and in what proportion. Those principles and criteria for reliability are precisely, that enable banks to achieve the goal of reliability and to be the backbone of financial systems in many countries. Most of those criteria were established precisely because of the need to maintain reliability in banking operations. Inadequate credit loans can lead to the presence of non-performing loans, which will ultimately lead to banking panic and the withdrawal of financial assets from the banking sector. The largest source of financing in the banking sector is the savings deposits of depositors. In order to protect the savings deposits of depositors, the security principles have been established by the central banks of the countries. In history, there are a large number of examples in which the inappropriate operation of banks led to mistrust in the banking sector. This is why the Central Banks have established clear principles and criteria of reliability in the operation of banks. Then with the help of the audits carried out by the central banks, the fulfillment of the same reliability principles is monitored. Achieving the three goals requires an optimal choice of credit loans, having in mind that the bank must have a certain level of liquidity to be able to satisfy the potential desire of depositors to withdraw their funds from bank accounts. At the same time, in order to make more profit, special attention should be put to the riskiness of credit loans. The more risky a credit loan, the more profitable it is. But often the risk is realized and the banks face losses and reduction of their reliability. Therefore, it is necessary to make an optimal choice of credit loans in terms of profit/risk.

Item Type:	Article
Subjects:	Social Sciences > Economics and business
Divisions:	Faculty of Economics
Depositing User:	Mila Mitreva
Date Deposited:	04 Apr 2024 10:17
Last Modified:	04 Apr 2024 10:17
URI:	https://eprints.ugd.edu.mk/id/eprint/33975

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