# How do banks make money from mortgages?



## z106 (9 Jul 2007)

Ok FOlks - if anyone can answer this for me I would be VERY grateful.

So - as the subject says,the question is how do banks make money from mortgages?

I have asked many people this and NO ONE knows !!

Lets go through 1 example.
ANd before people anwer in general terems can yee try to just answer in the context of te example please.

SO - lets say for arguments sake that interest rates are the same as inflation at 5%.
At the beginning of the year I borrow €1,000,000 on an interest-only mortgage.
By the end of the year lets say I pay back the initial capital along with the interest.i.e. I have paid back €1,050,000 - which obviously due to inflation means that it is the same amount in real terms as the €1m was 12 months ago.
i.e. the banks have made no money in real terms.

Can anyone explain how they have made money in that example.
Obviously something goes on in the background.
What is that something?


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## sally2007 (9 Jul 2007)

Say - you are borrowing the money @ 5% - they borrow it at cost of funds plus a margin to bring it up to 5% - that  margin is the profit!


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## z106 (9 Jul 2007)

What is the rate they borrow it at? The ECB rate ?
If it is,then they would only be making 1% or so.

I definitely don't think anyone would be happy with a 1% Return on investment (albeit guaranteed) - least of all a bank given all their investment expertise.


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## jammacjam (9 Jul 2007)

The bigger you are the lower the intrest rate you will get, if you think of intrest rates as the price for buying money the bank makes money in exactly the same way tesco does for milk. They can buy it cheaper and sell it on to you on a mark up. That's their profit.


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## z106 (9 Jul 2007)

Ya - but if see my previous mail, are you saying so that the banks make only 1%-1.5%-ish only on mortgages?


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## sally2007 (9 Jul 2007)

That's per annum - and consider the size of the mortgage lending book in Ireland - it adds up!!


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## gordongekko (9 Jul 2007)

There is also a lot of accounts with money in them paying very little interest, they use this money as well.


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## jammacjam (9 Jul 2007)

qwertyuiop said:


> What is the rate they borrow it at? The ECB rate ?
> If it is,then they would only be making 1% or so.
> 
> I definitely don't think anyone would be happy with a 1% Return on investment (albeit guaranteed) - least of all a bank given all their investment expertise.


 
yes but if you have thousands of customers on all those 1 per cents you have a huge profit, they are not investors, they are a business.Tesco only make 5 p on a carton of milk so why would you do that?


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## z106 (9 Jul 2007)

Hang on - now that is the reply I have gotten from people in the past. 
So when I said no one can answer it for me I should have said I no oner can answer it to my satisfaction.

I disagree that a lot of 1% adds up.

Banks are businesses - with shareholders.
WIth a major wing of ur business only making 1% profit is surely hard to believe.

WHat 1% adds up to in cash terms is surely irrelevant.
That may be fine for an individual.

But for a compoany with shareholders it's surely all about percentage returns ?

The assumption I am making is that I believe if a bank had all that money,instead of giving it out to customers for their guaranteed 1% profit,surely they would invest it in something else to return bigger returns than 1%?


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## KalEl (9 Jul 2007)

jammacjam said:


> yes but if you have thousands of customers on all those 1 per cents you have a huge profit, they are not investors, they are a business.Tesco only make 5 p on a carton of milk so why would you do that?


 
Exactly...it's like the car business. Many of the bigger garages make only 1% but that can be 1% of €500 million!
In the banks case the figures are astronomical...plus they make a lot more money on their other products.


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## jammacjam (9 Jul 2007)

qwertyuiop said:


> Hang on - now that is the reply I have gotten from people in the past.
> So when I said no one can answer it for me I should have said I no oner can answer it to my satisfaction.
> 
> I disagree that a lot of 1% adds up.
> ...


 
Well if you disagree that's fine but that's how they make the money.


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## z106 (9 Jul 2007)

It may translate to what sounds like a lot of cash - but they also have an astronomical number of shareholders.

I heard some theory before about how apparently they immediately sell on mortgages to investors.

Does anyone know anything about that ?

I'm very bague on teh details of it.


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## jammacjam (9 Jul 2007)

yes they have to sell some of them on to reduce their risk.


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## z106 (9 Jul 2007)

jammacjam said:


> Well if you disagree that's fine but that's how they make the money.


 
Jammacjam - I'm not saying you're wrong.
It does sound dodgy to me though.
Then again I am from an IT background so obviously i'm no expert.

I don't mean this in a smart way but what is ur own background ?
Yiu seem pretty certain you're right. ARe u in finance?

As in do you know for a fact - or it's an assumption you're making.

Again - I don't mean it in a smart way.
If you are from a banking background and can assure me 100% then I'm all the happier with that.


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## jammacjam (9 Jul 2007)

qwertyuiop said:


> Jammacjam - I'm not saying you're wrong.
> It does sound dodgy to me though.
> Then again I am from an IT background so obviously i'm no expert.
> 
> ...


 
yes I am in finance, with a related degree. I didnt mean to sound rude I dont know how else to explain it to you, 

I know it sounds dodgy but go back to the milk, tesco makes 5 cent on each one why would you do that? because you have a vast amount of customers who buy the milk/ borrow the money and all this combined makes your money for you, 1 per cent of 500,000 is a lot of money if you have 100,000 customers, for example. You also sell lots of other products like life assurance and tracker bonds and all these slices combine to make a huge amount of money.


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## z106 (9 Jul 2007)

jammacjam said:


> yes they have to sell some of them on to reduce their risk.


 
Hang on - now you're saying that there is some risk.

I thought you said a while ago that they borrow at one rate and lend at a higher rate.

WHich begs the question,exactly what risk are they trying to reduce?


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## demoivre (9 Jul 2007)

qwertyuiop said:


> It may translate to what sounds like a lot of cash - but they also have an astronomical number of shareholders.
> 
> I heard some theory before about how apparently they immediately sell on mortgages to investors.
> 
> ...



Google securitization.


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## jammacjam (9 Jul 2007)

qwertyuiop said:


> Hang on - now you're saying that there is some risk.
> 
> I thought you said a while ago that they borrow at one rate and lend at a higher rate.
> 
> WHich begs the question,exactly what risk are they trying to reduce?


 
The risk of your customer not being able to pay you back, currency risk,economic risk, risk of dependency on property.


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## z106 (9 Jul 2007)

Ok - forgive my maths but analyse the following.

Last year Bank Of Ireland made €2bn.

I think I read someplace that 60% of their business is from mortgages. i.e. €1.2bn.

If that translates to their 1% then that would mean they gave out €120bn. in mortgages - or €10bn a month.

Is that a fair estimation so of how much BoI give out in mortgages?


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## KalEl (9 Jul 2007)

qwertyuiop said:


> Ok - forgive my maths but analyse the following.
> 
> Last year Bank Of Ireland made €2bn.
> 
> ...


 
60% of your business does not mean 60% of your profits


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## sally2007 (9 Jul 2007)

Just reading up on mortgage books at the minute in Irish banks and irish residential mortgages accounted for just 10% of profits in BoI last year - and 6% in AIB so I think you're a little out with your 60% estimation


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## z106 (9 Jul 2007)

So if you had to hazard a guess, how much did BoI give out in mortgages last year?


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## KalEl (9 Jul 2007)

qwertyuiop said:


> So if you had to hazard a guess, how much did BoI give out in mortgages last year?


 
20 billion?


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## gonk (9 Jul 2007)

qwertyuiop said:


> The assumption I am making is that I believe if a bank had all that money,instead of giving it out to customers for their guaranteed 1% profit,surely they would invest it in something else to return bigger returns than 1%?


 
But it is a bigger return than 1%.

If you regard the bank's product as money, it "buys" it at a rate of say 4%. That is, to lend you €1,000, it has to pay €40 to someone (a depositor or another bank) for the loan of that money for a year. It in turn charges you, say 5%, or €50 for the loan of the same money for the year.

Its product has therefore cost it €40 and it has sold it onto you for €50 - that's a 25% profit margin - not 1%.

The point is the bank doesn't lend its shareholders' money - it lends depositors' money and other funds it raises on the money markets. That is how it can produce a healthy return for its shareholders.


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## ClubMan (9 Jul 2007)

qwertyuiop said:


> Hang on - now that is the reply I have gotten from people in the past.
> So when I said no one can answer it for me I should have said I no oner can answer it to my satisfaction.
> 
> I disagree that a lot of 1% adds up.


Banks make money not only from mortgages but lots of other types of loans with much higher margins. And other non credit products. You seem to be assuming that banks make most or all of their money from mortgages.


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## z106 (9 Jul 2007)

Yes - that was an assumption I was making.
ALthough Sally200 says it is only 6% for AIB.

I would have thought it was more than that given the effect that property is having on shareprices for banks these days - but i am certainly no expert.

Gonk - that's actually a very good way of looking at their return. 
i.e. 25% vs 1%.


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## Maine (9 Jul 2007)

sally2007 said:


> Just reading up on mortgage books at the minute in Irish banks and irish residential mortgages accounted for just 10% of profits in BoI last year - and 6% in AIB so I think you're a little out with your 60% estimation


 
If you ran a bank at the moment one thing you try to minimise was the % of profits you attribute to the residential property market.   That makes you look less risky etc.

So you may not include life assurance or critical illness or profits you make from lending to developers of residential property or the house insurance you sold with the mortgage. 

Banks themselves are massive geared plays hence even a small run up in bad debt provisions can eat into profits quickly.


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## roland (9 Jul 2007)

qwertyuiop,

take anglo irish bank.  they have about €50billion of loans on their books.  in your example, if they get 1% on each of those loans, that's €500million (each year).  they actually make about €1billion a year in profits.  so that would suggest they are getting about a 2% margin in profits.  as previous posters say, most banks pile 'em high and sell 'em cheap... anglo pile 'em high and sell 'em dear (2% profit per annum being dear!).


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## gordongekko (10 Jul 2007)

The question was answered in the second post how did this thread get to the second page?


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## Sunny (10 Jul 2007)

Also remember that any money you have lying around AIB, BOI, Ulster Bank etc earning 0.25% or whatever is lent back out at rates approaching 5% plus on mortgages and 8% plus on personal loans. Now thats an attractive return! In BOI's case, customer deposits account for 42% of their total funding and this is cheap funding for the bank. You are right that banks margins are falling and under pressure due to competiton and rising rates but nothing to worry too much about at the moment. By the way, BOI had a 25% return on equity last year so don't worry about the shareholders.


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## GeneralZod (10 Jul 2007)

Gonk's explanation is the clearest.


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## Sherman (10 Jul 2007)

GeneralZod said:


> Gonk's explanation is the clearest.


 
Exactly, and the only correct one. Lots of dodgy maths in this thread!


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## Sarah W (12 Jul 2007)

Sunny said:


> Also remember that any money you have lying around AIB, BOI, Ulster Bank etc earning 0.25% or whatever is lent back out at rates approaching 5% plus on mortgages and 8% plus on personal loans. Now thats an attractive return! In BOI's case, customer deposits account for 42% of their total funding and this is cheap funding for the bank. You are right that banks margins are falling and under pressure due to competiton and rising rates but nothing to worry too much about at the moment. By the way, BOI had a 25% return on equity last year so don't worry about the shareholders.



This is more correct. There is roughly 1 borrower to 6 savers and deposit rates are far, far lower than borrowing (mortgage/unsecured) rates. There is a margin for costs (administration) and bad debt but the spread is where the profit is largely made.

Sarah

www.mortgagesoverseas.com


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## South (12 Jul 2007)

Sarah W said:


> This is more correct.
> 
> www.mortgagesoverseas.com


 
More correct than what?

It is the margin on the ECB cost of funds that would seem to be the most likely source of the profits.


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## ang1170 (13 Jul 2007)

I can't believe this thread.  To get back to the OP:



qwertyuiop said:


> Can anyone explain how they have made money in that example.
> Obviously something goes on in the background.
> What is that something?


 
The thing that's going on in the background is that the bank doesn't actually have the €1m it loans you in the first place. This is fundamental to the way banking works.


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## ClubMan (13 Jul 2007)

ang1170 said:


> The thing that's going on in the background is that the bank doesn't actually have the €1m it loans you in the first place.


Can you expand on this a bit? A house buyer gets money into their hand (or at least a cheque into their solicitor's hand) to buy a home. Where does this come from if not from the lender? Obviously the lender will probably borrow it from elsewhere but the borrower ultimately gets the money from the lender.


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## South (13 Jul 2007)

ClubMan said:


> Can you expand on this a bit? A house buyer gets money into their hand (or at least a cheque into their solicitor's hand) to buy a home. Where does this come from if not from the lender? Obviously the lender will probably borrow it from elsewhere but the borrower ultimately gets the money from the lender.


 
Banking 101 - they borrow it from X and lend it to Y...at a margin, make money on other people's money.
Q.E.D.


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## Sunny (13 Jul 2007)

South said:


> More correct than what?
> 
> It is the margin on the ECB cost of funds that would seem to be the most likely source of the profits.


 
A banks entire mortgage book is not funded entirely from wholesale funding i.e. from other banks etc. As I mentioned above in BOI's case 42% of their funding comes from their own customers deposits on which they are are they are not paying anything close to the ECB rate. 22% from bank deposits, 11% from debt/covered bonds, 11% from Commercial paper and 14% other sources. So you can't just says a banks margin is the difference between the ECB rate and the rate it charges on the mortgage as not all the banks liabilites cost the ECB rate. As far as I can remember BOI's interest margin is about 1.6% albeit falling all the time due to falling mortgage margins and increased reliance on more expensive wholesale funding.


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## South (13 Jul 2007)

Banks make profits by using other people's money (ECB, customers, whoever) and lending it at fat margins.

Why else would the ECB rate have such a dramatic impact on us punters?


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## Sunny (13 Jul 2007)

South said:


> Banks make profits by using other people's money (ECB, customers, whoever) and lending it at fat margins.
> 
> Why else would the ECB rate have such a dramatic impact on us punters?


 

Sounds like the old 3-6-3 rule that used to apply for banking

Borrow at 3%, lend at 6% and be on the golfcourse by 3!!


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## ang1170 (13 Jul 2007)

ClubMan said:


> Can you expand on this a bit? A house buyer gets money into their hand (or at least a cheque into their solicitor's hand) to buy a home. Where does this come from if not from the lender? Obviously the lender will probably borrow it from elsewhere but the borrower ultimately gets the money from the lender.


 
That's exactly what surprises me about this thread: the assumption that banks actually have the funds that they loan out. If the reserve requirement was 100% this would be the case, but it's far from it.


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## shanegl (13 Jul 2007)

OPW - Other People's Money

If everyone tried to withdraw their deposits from banks, they wouldn't come anywhere near being able to cover it.


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## ang1170 (13 Jul 2007)

But it's not "Other People's Money" - it doesn't exist anywhere (apart from a small percentage)!

It's pretty basic stuff, guys....


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## shanegl (13 Jul 2007)

Sorry, fractional reserve banking isn't everyone's forte.


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## ang1170 (13 Jul 2007)

shanegl said:


> Sorry, fractional reserve banking isn't everyone's forte.


 
That's what surprises me about the thread: the number of people offering up explanations when they clearly don't know how the banking system actually works.


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## Sunny (13 Jul 2007)

ang1170 said:


> That's exactly what surprises me about this thread: the assumption that banks actually have the funds that they loan out. If the reserve requirement was 100% this would be the case, but it's far from it.


 
Where is the assumption on this thread that banks fund all their loans from their own money?


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## shanegl (13 Jul 2007)

The assumption is that its funded from existing money, which isn't true. The money is created.

Wikipedia illustrates his point here in table 1:

http://en.wikipedia.org/wiki/Fractional_reserve_banking


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## ang1170 (13 Jul 2007)

Sunny said:


> Where is the assumption on this thread that banks fund all their loans from their own money?


 
Pretty much all the responses. For example, in the first response to the OP (not wishing to single anyone out) "....they borrow it at cost of funds plus a margin to bring it up to 5%". 

It's pretty clear from this and other posts that the most contributors seem to think that for every €1 loaned out, there's a €1 that the bank actually has (either in deposits or its own borrowings). This is just not the case.


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## ClubMan (13 Jul 2007)

ang1170 said:


> But it's not "Other People's Money" - it doesn't exist anywhere (apart from a small percentage)!
> 
> It's pretty basic stuff, guys....


How is it "pretty basic" to say that the money to clear the cheque handed to the buyer's solicitor does not exist somewhere?


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## dublinli (13 Jul 2007)

it exists, but most of it on paper, your cheque goes to the builder, the builder pays sub-contractors by cheque sub contractors pay workers etc etc, so at the end of the day a portion of the original money actually leaves the bank the rest stays in the system, which is where you can generate more money in the system than there actually is, money multiplier


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## gonk (13 Jul 2007)

ang1170 said:


> Pretty much all the responses. For example, in the first response to the OP (not wishing to single anyone out) "....they borrow it at cost of funds plus a margin to bring it up to 5%".
> 
> It's pretty clear from this and other posts that the most contributors seem to think that for every €1 loaned out, there's a €1 that the bank actually has (either in deposits or its own borrowings). This is just not the case.


 
OK, now that you have pointed out our ignorance, we stand duly corrected. Now, how about a constructive answer to the OP's question?


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## GeneralZod (13 Jul 2007)

Gonk, seems to me your explanation is still the best. It just could be pointed out that some of the "product" is deposits coming back that were funds already loaned out. This effect wasn't precluded your explanation. The cost of providing this product is the interest rate paid to the depositor. That's the same as the cost of providing interest on the original deposit.


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## Sunny (13 Jul 2007)

ang1170 said:


> It's pretty clear from this and other posts that the most contributors seem to think that for every €1 loaned out, there's a €1 that the bank actually has (either in deposits or its own borrowings). This is just not the case.


 
I might be a bit slow but I don't follow what you are trying to say. I borrow €1000 from a bank which then goes onto the banks balance sheet as an asset? What is the corresponding liability? The asset has to be funded somehow. And I don't think this thread needs to move into reserves, deposit multipliers, capital requirements etc to show how the bank is able to leverage up its balance sheet.


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## ang1170 (13 Jul 2007)

gonk said:


> OK, now that you have pointed out our ignorance, we stand duly corrected. Now, how about a constructive answer to the OP's question?


 
First off, apologies for the tone of my previous posts on this: re-reading them there's more than a hint of condescension about them.

The OP in his question describes banks in terms of any other wholesale or retail business: buying something (in this case cash) in bulk at one rate and selling it on to customers at a different rate. The responses all seemed to accept this analysis, and make points about whether the different rates are or aren't enough to explain their profits. The point I tried to make is that the OPs analysis isn't acurate: banks aren't simply borrowing from Peter (whether real borrowings or taking deposits) to pay Paul.

Does that answer the OP's question?


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## Sunny (13 Jul 2007)

ang1170 said:


> The OP in his question describes banks in terms of any other wholesale or retail business: buying something (in this case cash) in bulk at one rate and selling it on to customers at a different rate. The responses all seemed to accept this analysis, and make points about whether the different rates are or aren't enough to explain their profits. The point I tried to make is that the OPs analysis isn't acurate: banks aren't simply borrowing from Peter (whether real borrowings or taking deposits) to pay Paul.
> 
> Does that answer the OP's question?


 
I still haven't got a clue what you are trying to say. People responded to the OP's post by keeping the matter simple by simply saying that banks main profits come from the difference in what it recieves on its earning assets and how much it pays to fund these assets. Its a simplified answer but it works. I am not sure what you mean by saying the 'money doesn't exist' and 'they don't just borrow from Peter to pay Paul'. How do they fund the assets?


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## ang1170 (13 Jul 2007)

GeneralZod said:


> Gonk, seems to me your explanation is still the best. It just could be pointed out that some of the "product" is deposits coming back that were funds already loaned out. This effect wasn't precluded your explanation. The cost of providing this product is the interest rate paid to the depositor. That's the same as the cost of providing interest on the original deposit.


 
Gonk's explanation is correct, but it misses the point that the amounts loaned at the higher rate are much higher than the amounts borrowed (or held on deposit) at the lower rate: there's a multiplier effect in operation.


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## shanegl (13 Jul 2007)

> How do they fund the assets?


 
They fund the assets by creating money, by recycling deposits into loans.


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## Sunny (13 Jul 2007)

shanegl said:


> They fund the assets by creating money.


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## shanegl (13 Jul 2007)

Limited by reserve requirements, that's exactly what happens.


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## Sunny (13 Jul 2007)

shanegl said:


> They fund the assets by creating money, by recycling deposits into loans.


 
Sorry you added the last bit after I responded. Yes they do indeed to that but very few bank have enough deposits to cover their loan book. What do they do then?


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## shanegl (13 Jul 2007)

They don't have to do anything, because they only have to hold a percentage of the loans as a reserve. Money that they lend out comes back to them as deposits, which they loan out again, etc etc. As long as there isn't a run on the bank, the system works.


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## shanegl (13 Jul 2007)

If you look at table 1 in the wikipedia link I posted above, you'll see what I mean, its explained much better than my sausage fingers could manage.


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## Sherman (13 Jul 2007)

So say if banks in Ireland have a 10% reserves requirement.

Does that mean that for every €100 in deposits they have sitting in an account, they can lend €1,000?


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## shanegl (13 Jul 2007)

Basically, yes. €1,000 is the maximum they can loan.


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## Sunny (13 Jul 2007)

Sherman said:


> So say if banks in Ireland have a 10% reserves requirement.
> 
> Does that mean that for every €100 in deposits they have sitting in an account, they can lend €1,000?


 
You can't just turn €100 deposit into a €1000 loan by adding a zero. The reserve requirement has got to do with regulatory and solvency reasons and has nothing to do with profits in the sense that you talking about it. Its a balance sheet guys. It has to balance. If there is an asset on the balance sheet, it has to be funded by a liability.


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## GeneralZod (13 Jul 2007)

ang1170 said:


> the amounts loaned at the higher rate are much higher than the amounts borrowed (or held on deposit) at the lower rate



Do you have any concrete data on typical multiples in Ireland. The Wikipedia link mentioned a theoretical max of 3.33 with a reserve ratio of 30%


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## command (13 Jul 2007)

The bank liquidity ratio means that the bank can lend more money than it has to repay. In order to lend you €1,000 it must have €1,000. However the banking system only needs to have €300 (assuming a liquity ratio of 30% has been imposed by the central bank)

Bank of Ireland or AIB do not print money any more. The central bank does. Traditionally money was precious metal and its value depended on the metal it was made out of. Therefore a silver dollar was worth less than a gold soverign. 

As banking systems evolved rather than carrying around a gold bar in your pocket to buy something you gave the gold bar to the bank and they gave you a note to say you had a gold bar. If the bank was minding €1,000 worth of gold in its vault it would issue notes and coins to the value of €1,000. 

The banks then worked out that the owners of the €1,000 in gold were not all going to arrive into the bank on the one day and look for their gold back. Therefore the bank issued more bank notes. So it went and printed another €2,000 in notes and loaned them out to its customers. Now it was paying interest on €1,000 but was charging interest on €3,000 and making good profits. The difference between the rate it was paying out and what it was charging on the loans became acidemic, it could pay the same interest to deposit holders as it was charging borrowers and still make money.  

Your point in relation to borrowing €1,000 from your bank is valid. The bank does have a coresponding liability for each asset. The banks make the profits they do because the banking system has more money in circulation than deposits or assets. 

This is how you got a "run on the bank". People know that the bank had less money in the safe than it had loaned out and if you didn't get to the top of the queue to get your cash then you were goingto be left with nothing. 

The banking system makes the money, the individual banks just slice up the cake between them. 

Apologies if the post came accross as a bit simplisitc.


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## shanegl (13 Jul 2007)

Sunny said:


> You can't just turn €100 deposit into a €1000 loan by adding a zero. The reserve requirement has got to do with regulatory and solvency reasons and has nothing to do with profits in the sense that you talking about it. Its a balance sheet guys. It has to balance. If there is an asset on the balance sheet, it has to be funded by a liability.


 
I never claimed that's how it works. Its a process. 

It would start by lending out 90 of the 100, then receiving it back as a deposit. Liabilities are now 190, Assets are the loan of 90 plus the initial deposit of 100. The books balance.

Now the bank can lend out an extra 81 (90% of 190 = 171. Subtract existing loan of 90). Then receives it back as a deposit. Liabilities are now 271. Assets are the initial deposit of 100, the first loan of 90 plus the second loan of 81 = 271. Again the books balance.
Feel free to correct me.

You can't just turn 100 into 1,000. But by rinsing and repeating the above (extremely simplified) process you approach the maximum of 1,000 asymptotically.


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## ang1170 (15 Jul 2007)

After thrashing that one out to death, I presume the OP's question can be considered answered:



qwertyuiop said:


> SO - lets say for arguments sake that interest rates are the same as inflation at 5%.
> At the beginning of the year I borrow €1,000,000 on an interest-only mortgage.
> By the end of the year lets say I pay back the initial capital along with the interest.i.e. I have paid back €1,050,000 - which obviously due to inflation means that it is the same amount in real terms as the €1m was 12 months ago.
> i.e. the banks have made no money in real terms.
> ...


 
- they make their profits from the differential between the rates
- and on top of that, yes, there is something going on in the background: there's more loaned out than held on deposit


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## kilkerry (6 Aug 2007)

The way I look at it, is that if you view the mortgage of 1000000 as a single product ie they buy a mortgage product (1000000) at ecb rate of 3.5%, and they then sell it to you at 5%  The mortgage product costs them 35000 to buy, (100000 x .035) and they sell it to you at 50000.  Therefore they are making 15000 profit on their investment of 35000, making a net margin of 30%.
Furthermore, banks use their deposits to lend to people, giving very poor interest on the deposits yet charging 5% on the mortgage. Using your example, they would give less than 1% interest to the depositer, and charge you 5% on the mortgage, making a profit of 40000 and a net margin of 80%.  
To conclude, dont worry the banks are making plenty of money from your mortgage.


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