In this assay, I will examine the relationships banking, starting with the Definition of Relationship Banking, then I will explain the benefits and costs of relationships banking, and in the end I will answer the question how relationships banking reduces information asymmetries.
Definition of Relationship Banking
The concept of Relation Banking is a strategy used by banks to their enhance profitability. They accomplish this by cross-selling financial products and services to strengthen their relationships with customers and increase customer loyalty. Relationship banking includes offering customers a wide range of financial products and services that go behind simple checking and savings accounts.
In addition to these two basic products, relationship-banking products may include certificates of deposit, safe deposit boxes, insurance, investments, credit cards, loans and business services (ex, credit card processing). They may also include specialized financial products designed for specific demographics, such as students, seniors or the wealthy.
Benefit of Relationship Banking
As a bank provides a set of services through time to a customer, it gains substantial knowledge about the customer and its financial needs. The bank can use this inside information to establish a close relationship with the customer. This relationship can lead to benefits for both the customer and the bank.
The relationship banking can help banks learns more about a customer's payment pattern, it can suit contracts to directly match the financial needs of the customer. A loyal customer will be more willing to purchase all of its financial products from the bank it trusts, aiding the bank in the marketing of profitable new products.
Relationship banking can help banks in monitoring the default risk of borrowers, providing the banks with a comparative advantage in lending. Relationship banking can also lower banks’ cost of...