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.
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.
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.
Where is the assumption on this thread that banks fund all their loans from their own money?
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
Wikipedia illustrates his point here in table 1:
http://en.wikipedia.org/wiki/Fractional_reserve_banking
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.
How is it "pretty basic" to say that the money to clear the cheque handed to the buyer's solicitor does not exist somewhere?
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
G
gonk
Guest
OK, now that you have pointed out our ignorance, we stand duly corrected. Now, how about a constructive answer to the OP's question?
GeneralZod
Registered User
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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.
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.
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?
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?
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.
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?