Final answer:
A financial institution increases profitability by borrowing money to invest, a process known as leveraging. Borrowing from banks or issuing bonds are ways to access capital, maintaining control over the firm but committing to interest payments. The 2008-2009 Great Recession highlighted the dangers of this financial stress.
Step-by-step explanation:
The process through which a financial institution like 'Storgan Manley' increases its profitability by borrowing money to invest is known as leveraging. Leveraging allows firms to amplify their investment capacity beyond what would be possible using only their own capital. In essence, it involves borrowing funds to invest in assets that the firm expects will generate a return on investment higher than the interest they must pay on the borrowed money.
Firms can access financial capital in a few ways: by borrowing from a bank, issuing bonds, or selling stock. Borrowing and issuing bonds have the advantage of maintaining full control over the firm's operations, as it doesn't involve giving up any ownership. However, this comes with the disadvantage of committing the firm to scheduled interest payments regardless of the firm's income at the time. This debt structure can be risky, as seen during the 2008-2009 Great Recession, when firms under financial stress struggled to manage their debt, impacting the broader economy.