How falling interest rates but increasing banking output give higher banking profits. A trade off. : A simulation analysis with linear programming. The expected case of falling interest rates as a condition for Greece to enter the euro Area
Part of : Αρχείον οικονομικής ιστορίας ; Vol.XI, No.1-2, 2000, pages 179-196
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179-196
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In this article I will try to point out that, by means of simulation analysis and linear programming, bank profits will be higher in case of falling interest rates and increasing banking output, provided that the rate of increase in output is higher than the rate of decrease in the weighted average interest rate of all bank services. In this article, it is assumed that the bank offers ten banking products (services). Each service will have its own interest rate. The bank buys an amount of capital in a fixed interest rate , and produces ten various services at a different interest rate each. In each service a different spread in the interest rate is used. The resulting revenue must cover at least the labour cost. Then, the resulting difference will be the net banking profits before tax. A rigorous assumption throughout this model is that of the perfect malleability of labour. It is to this end assumed that the labour law permits labour contracts by the hour, or according to the volume of expected turnover, instead of the usual contract of fixed eight hours per day. Hence, within this framework, and with the help of simulation analysis and linear programming, I will point out that if the rate of decrease in the weighted interest rate (of bank services) is less than the rate of increase in the volume of total banking services, then, the banking profits will increase. Especially, in the Greek case, where the labour cost is by strict legal system rigid downwards, this article is to break the traditional frontiers towards a feasible optimum solution and will help Greek banks to be more competitive costwise in order to enter the euro area.
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