Banks - how they work today?

M

macroman

This is what I figured out.... But not sure if missing something (numbers only for illustration):

How it used to be, at least I thought so) : bank took depositor money at 4% and lent it for 7%. 3% was for the costs commsions and profit. So in a year they made 300M.

Next steage: there was reserve ratio say 10%. Meaning Bank had to have 10b deposits to be able to lend 100B. Extra 90B money came from selling bonds reserve bank. They paid depositors 4%, bonds say 5% and reserve bank 4%. They make 3% on 100B which is 3B.

Next and current : reserve ratio 10%. They introduced matching and credit cards. If person A borrows 1M and pays person B for property for example and person B is with the same bank, and uses credit card then money (paper) never has to be delivered, this 1M does not have to be borrowed by the bank. Bank created money by itself and pockets full 7% that charges borrower. If for example banks connect and this matching goes across banks there is no need for actually bank borrowing money. Probably also hide from official eyes. So they make 3% on 10B, lent another 500B and pocket 7% on that which is 35B, so in total they make 35.3b profits per year witn 10B deposits. So, does not really matter what the deposit rate is. Even if 15% who cares. Bulk comes from that virtual money. Every bp in interest makes large differece to profit. One would think banks would be motivated to push interest rates up and faaarrrrrr.


comments ??
 
the higher the interest rate the less borrowers.

banks are in the business of lending money

loans are 'assets'

the more loans the more profits.

most of the investors who investing real estate or hedge funds borrow the money from investment banks or prime brokerages. Just like the loan when retail investor goes in margin.

the broker borrows money from the bank.

there is limited or finite amount of bonds,equities,commodities to invest hence rise in inflation. investment grade securities is limited. if you know what investment grade is.


Quote from macroman:

This is what I figured out.... But not sure if missing something (numbers only for illustration):

How it used to be, at least I thought so) : bank took depositor money at 4% and lent it for 7%. 3% was for the costs commsions and profit. So in a year they made 300M.

Next steage: there was reserve ratio say 10%. Meaning Bank had to have 10b deposits to be able to lend 100B. Extra 90B money came from selling bonds reserve bank. They paid depositors 4%, bonds say 5% and reserve bank 4%. They make 3% on 100B which is 3B.

Next and current : reserve ratio 10%. They introduced matching and credit cards. If person A borrows 1M and pays person B for property for example and person B is with the same bank, and uses credit card then money (paper) never has to be delivered, this 1M does not have to be borrowed by the bank. Bank created money by itself and pockets full 7% that charges borrower. If for example banks connect and this matching goes across banks there is no need for actually bank borrowing money. Probably also hide from official eyes. So they make 3% on 10B, lent another 500B and pocket 7% on that which is 35B, so in total they make 35.3b profits per year witn 10B deposits. So, does not really matter what the deposit rate is. Even if 15% who cares. Bulk comes from that virtual money. Every bp in interest makes large differece to profit. One would think banks would be motivated to push interest rates up and faaarrrrrr.


comments ??
More...
 
Quote from fanews:

the higher the interest rate the less borrowers.

B]
More...


but borrowers already borrowed and no enough new borrowers available to bother. If bank itself creates money by matching bank accounts ( legal or not, not sure, but my view, if it is sossible and profitable then exists ) then next step to increase profits would be to increase interest rates . No?
 
A steep curve, i.e. higher long-term rates is good for banks, yes, that's a well-known fact. But not quite for the reason you've given.
 
Quote from macroman:

but borrowers already borrowed and no enough new borrowers available to bother. If bank itself creates money by matching bank accounts ( legal or not, not sure, but my view, if it is sossible and profitable then exists ) then next step to increase profits would be to increase interest rates . No?
More...

Lets say they push rates up to 15%. First off...who would borrow? 2nd, the people stupid enough to borrow will eventually default and the bank is on the hook for that lost money which would in turn means they have to sell off assets which means the bank cant loan more money off those assets which means they have to sell more assets and you can see how the death spiral happens and why so many banks have failed the last 2 years(thanks to ARM's)
 
destruction of money not that simple but it is desirable by banks for that reason - matching. Bank want to play reserve bank role and want you to spend (destroy money). That explains this bit.

If they manage to destruct + side of equation, get clean cashflow. Increasing rates too much too fast will kill the object but sure there is some finetuning going on. If 2 banks work in tandem and match debits and corresponding credits then there is no danger until money stays in the system. Maybe only banks that atre not in loop go.... or beeing purchased if they have favourable structure.

In my opinion 90+% of cash does never leave the loop. I am thinking here about thousands and thousands customers, so couple frikish ones does not matter. Some kind of monte carlo simulation must be quite handy to finetune paramters :-)

this is my thinking only and is a hypotesis which I think has enough odds of beeing true in one or the other form to use for macro trading decisions.

Increased interest rates !!!!!
 
You must log in or register to reply here.
Back
Top