Effects of Operational Cost on Bank Profitability and Banks Clients: A Methodological Approach

Abstract

This paper attempts to investigate the influence of the operational cost of a bank, which is actively involved in a specific sector of the economy, on the behavior of its clients who are the depositors and the borrowers. Our analysis consists of two parts, the theoretical and the empirical one. In the former we state the maximization problem faced by the bank and its clients, deriving the levels of time deposits and lending rates for which the profit function is maximized. Furthermore we illustrate the effects of a change in the rate of operational cost on the optimal levels of these interest rates, which in turn affect the maximized profits and the utility of the individuals. Using a simulation we confirm the arguments stated in the theoretical part.

Keywords: Utility, Bank Profit, Lending Rate, Operational Cost

JEL Classification: C61, D11, D12, D42, G21