Why and How do Banks Raise Capital?

“How do banks raise capital” is a question that is best understood by looking at the basics of a bank. Just as a business sells its products or services as its main line of business and thus its survival; a bank has the business of lending and recovering from customers at the core of its raison d’ etre. To make the question of how do banks raise capital easier, let us think of money as the raw material for a bank’s business. If a manufacturing firm such as textile business has to assemble raw materials that start with cotton, a bank has only money that it plans to lend to its customers as its raw material.

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As the bank is providing the money for customer to spend, there is risk involved, such as; if the customer does not pay the bank. Therefore, banks charge a huge amount of interest on credit limits used. Apart for loans and deposits, banks raise capital through investments and securities.

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