Financial Management in Banks Essay Example | Topics and Well Written Essays - 1000 words

financial Management in Banks - Essay ExampleIt is said to be very essential beca engage it decreases the chances of loss and enhances profit expectation.Like any other firm, the ultimate objective of banks and pecuniary institutions is to maximize profit and dish outholder wealth. Financial solicitude plays an important role in achieving these goals in banks. The important aspects of financial precaution such as capital budgeting, investment appraisal, capital structure and insecurity management are some very important considerations in banking operations. Maximization of profit and shareholder wealth is moreover possible if banks perform its fundamental activities i.e. advancing loans and receiving deposits in a manner that can minimize the elements of venture. For this utilization, the use of financial management is very important in banks. The preceding paragraphs elaborate the use of financial management in banks for the maximization profit and shareholder wealth and t he importance of risk management techniques in this regard.Financial management is considered to be very crucial when a bank undertakes a unexampled project or investment. Investment and capital budgeting decisions in banks are taken on the basis of positive NPV criterion. It is because of the fact that it is arranged with the notion of shareholder wealth maximisation as a positive NPV means increase in the pass judgment bank cash flows (Schroeck, 2002). Therefore, when decisions are taken on the basis of positive NPV, they are expected to enhance profit as well as shareholder wealth in the form of share price maximization. These new projects and investments have a great impact on bank cash flows, pelf and shareholder wealth. The use of financial management capital budgeting techniques help bank to stabilise their rate of production and minimise costs. Risk management is one of the most essential aspects of bank activities. Managing risk is important for the purpose of profit a nd shareholder wealth maximization. Banks confront with lending capacity restrictions and rising cost of acquiring new funds. This makes it crucial for banks to invest their funds in a prudent manner by employing various risk management techniques (Froot and Stein, 1995). Risk management helps a bank to reduce the volatility of its expected cash flows and compensation and thus increase the chances of profit and shareholder wealth maximization. It protects a banks stock price to fluctuate in response to market uncertainties and stabilises return on equity. Risk management can also lead to decrease of cost of capital as it enables banks to proactively acquire enough funds to meet its future investment needs. shareowner rank is also protected as risk management techniques prevent fluctuations in the market value of banks (Schroeck, 2002). Increasing competition in banking sector due to ever increasing number of banks is also fit the major source of risk. Banks remain ready to adva nce loans without extracting complete information on borrowers capacity and trust rating. This leads to increase in banks credit risk because most borrowers fail to pay off the loans they acquire (Marquez, 2002). The risk in the banking sector has increased a lot in the recent year. Many