The Financial Crisis Final Piece: Idea 1 Change How Bankers Get Paid

Issue 1: Change How Bankers Get Paid

Comments (5)

You must be logged in with Student Hub access to post a comment. Sign up now!

  • Tiff-Avatar.jpg Tiff @ Topical Talk 18 Dec 2018

    Great job explaining your idea and thinking about its effects. If banks are businesses as you say, what might be a problem with discouraging risk taking?

  • Banks are businesses since their objective in what they are doing is to earn profit and as much money as possible. If they lose money, they cannot afford to pay the price and will fail to be open. However, if they earn profit, they can keep going in what they are doing and by this, they can give more loans to people and take more risks, hoping that they will get profit- this is more or less the same as a business.

    The problem with discouraging risk taking is because in order to earn more money, you need to take risks with people and it could result you with a huge amount of profit. If the banks do not earn money from their failing businesses, therefore, banks cannot put money forward in more businesses so they will have to discontinue the failing business.

    For example, the bank gives £7,000,000 to a person who can pay the loan. This is a huge risk since they are giving a huge sum of money to the person however, they do not know if the person will return the money back or if the person will pay the full amount of money back on the right time. This is a risk since the banks do not know the outcome of this situation. Since the person has a loan of £7,000,000 on an annual interest of 10% payable in 15 years, the person has to pay the initial loan amount of £7,000,000 plus the 10 years interest amount of £10,500,000. This is positive for the bank since they have the extra £10,500,000 (all together £17,500,000) of profit, which they can put forward in their business, in order to earn more money for their business.

    On the other hand, risks are not good because it could result the banks in losing a huge amount of money. This could cause your bank to have no money at all which would result your bank in having not enough money to give to people who desperately want loans and also people with savings accounts. This - since the bank does not have enough money to spend and give for other people - would lead other banks to help the bank to regain its money.

    An example of this is a person who wants £900,000 (but has a high interest rate of 4% for 25 years) in order for them to buy a decent house (in the 21st century currently); the bank is not sure if the person can continuously pay the money back with the interest. Since the bank gave the person a huge sum of money, which the person could not afford to pay, the bank had a massive loss of £900,000. This is a negative loan since the bank gave him £900,000 expecting to pay the money with 4% of interest, which totals up to £1,800,000 by end of the 25 years. If the banks take risks like this but constantly have negative outcomes in their loans, they will have to shut down.

    In conclusion, the bankers’ bosses should encourage the bankers to do risk taking and employ professional people to minimize or no risk investments (because risk taking can, in some occasions, gives you a lot of money) however, risk taking should not be done often (since at the same time, it can lose your bank lots of money).