How do banks make money from mortgages?


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

It's pretty basic stuff, guys....
 
shanegl said:
Sorry, fractional reserve banking isn't everyone's forte.
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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.
 
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.
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Where is the assumption on this thread that banks fund all their loans from their own money?
 
Sunny said:
Where is the assumption on this thread that banks fund all their loans from their own money?
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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.
 
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....
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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
 

OK, now that you have pointed out our ignorance, we stand duly corrected. Now, how about a constructive answer to the OP's question?
 
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.
 
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.
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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.
 
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?
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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.
 
shanegl said:
They fund the assets by creating money, by recycling deposits into loans.
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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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