1)Explain the main objective of a commercial bank with respect to net spread and leverage

Answer 1. Main objective of Commercial Banks is to earn profits through banking activities. There are two main functions of Commercial Banks viz. accepting deposits and lending money. Bank has to pay interest on deposits and it receives interest on the loans. Net spread is the difference between interest paid and interest received. It is similar to profit margin. In general, the larger a bank's interest rate spread, the more it earns. When interest rates change, means, the interest a bank receives on its assets and pays on its liabilities fluctuates and can decrease or increase its income. Thus, it is important to monitor changes in net interest rate spreads as well as the size of those spreads.

Another main objective of bank is to ensure solvency. Leverage ratio is helpful in this regard. A bank lends out money which are "borrowed" from the clients who deposit money there. All of these deposits are callable at any time. Banks often have more traditional creditors as well. The leverage ratio is used to know  just how much debt the bank has relative to its capital. It is considered safer for a bank to have a higher leverage ratio. It measures the extent to which a bank has financed its assets with equity. It does not matter what those assets are, or what are their risk characteristics. Leverage ratios effectively place a cap on borrowings as a multiple of a bank's equity. The main objective of this ratio is to minimize banking crises.

The Formula for the Leverage Ratio is

(Tier 1 Capital/ Total Consolidated Assets) ×100

Banks are following basel norms for the calculation of this ratio.

Answer 2.The primary change the law introduced is the creation of a new kind of financial institution: the financial holding company (FHC). A FHC is essentially an extension of the concept of a bank holding company—an umbrella organization that can own subsidiaries involved in different financial activities. This is the law that serves to partially deregulate the financial industry. This allows companies working in the financial sector to integrate their operations, invest in each other's businesses and consolidate.

The Financial Services Modernization of 1999 allows banks, insurers, and securities firms to start offering each other’s products as well as to affiliate with each other. In other words, banks are allowed to create divisions to sell insurance policies to their customers and insurers can establish banking divisions e.g. banks can now form financial holding companies that will include divisions to conduct nonbanking business. Banks can also create subsidiaries that conduct banking activities.

The law includes other changes for the financial industry such as requiring clear disclosures on their privacy policies. Financial institutions are required to inform their customers what non public information about them will be shared with third parties and affiliates. Customers will be given a chance to opt out of allowing such information to be shared with outside parties. This is the main risk associated with it. This change has made the banks a "super market " for financial services. Means everything is now available under one roof. But it carries the risk to other specialized instructions which are expert in their own field.