The Influence Of Operational Cost On The Bank’s Profitability And The Welfare Of Its Clients: A Theoretical Approach

Abstract

This paper deals with the way the rate of operational cost, as a proportion of time deposits, affects the optimal level of a monopolistic bank’s profits as well as the utility of its clients. In particular we prove that the optimal level of banking profits is negatively related to the rate of operational cost, while changes of the latter affect negatively the time deposit rate and positively the lending rate. As a result of these changes in interest rates, the utility of both borrowers and depositors is proved diminished.