Sarah argues that the banking system is a necessary part of the modern capitalist system and that without it there would be much less prosperity. Max responds that banks are institutions prone to irresponsible behaviour and that they tend to exacerbate inequalities. Discuss the opinions of Sarah and Max. Make sure you use the principal-agent model that we saw in class to analyse the relevant problems.
Banks have become an essential part of our lives . Not only does it keeps our money safe but also provides interest payments , loans and other facilities . The banking system is primarily responsible for credit creation and circulation of cash . This fuels the capitalist economy .
On the other hand , banks works upon a collection of contracts between agent and principal . If these contracts are not honoured properly then the principal-agent problem arises . Banks provide loans to people without knowing their true intentions (moral hazard problem ) . This can cause profits to the bank or even NPA . Thus this accounts for irresponsible behaviour of the bank . Banks provide loans to rich businessmen increasing wealth inequality . These loans help them to prosper further , keeping the other section of the society in low income .
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