Where do banks get their money from?

evolutionij

Has anybody ever seen a male and a female pound (dollar, Frank, Yen, Krugerrand, Deutschmark) get together in a bank vault and produce a little forty pence?
Or put it another way; is there a really stupid bank manage who, for every two pounds he is given, gives back two pounds forty?
The answer in Tellytubby Land is that they invest in something or other. In what? Some other financial institution? Same question follows.
So what is it that they, or anybody, invests in?
Put another but general way, where does their profit come from? Or who? What is the ultimate thing that produces more that its own value?
Ponder, ponder, ponder!

lozzy81

They make the money from the interest they charge on mortgages, credit cards... loans over drafts....

Archi_Bald

https://www.google.co.uk/search?q=how+do+banks+make+profit&rlz=1C1CHFX_en-GBGB533GB533&oq=how+do+banks+make+profit&aqs=chrome..69i57j0l5.6863j0j4&sourceid=chrome&es_sm=93&ie=UTF-8

PeacefulWaters

Hands up if you smell a conspiracy theory within 24 hours.

Gromitt

evolutionij wrote: »

Put another but general way, where does their profit come from?

I take it you are not with a building society which sends out those little booklets telling you their accounts, profitability, and how they made it?

Likewise, anyone in the last 12 months could have invested in certain stocks and shares and made a healthy profit. Heck, even certain funds have been returning a profit of 30% or more.

JohnRo

From thin air.

Freecall

When I was at University 40 years ago, it was called the pyramid of credit and my economics lecturer made sure that we all understood where banks get their money because it is so important to the way in which the economy works.

Say you deposit £1 in a bank, how much can the bank lend?

A reasonable answer to that question is £3.

Actually the answer is determined by regulation not by economics. It turns out that in order to have money to lend the bank does not require any money at all. Let me try and explain.

Firstly you need to put out of your mind the idea of individual banks. In economic terms it is the banking system that we need to think of as a single entity because that is the way it operates from an economic point of view.

Now suppose you want to go and borrow £10,000 to buy a car. You go along to see your friendly Bank Manager (you would probably go on-line these days but this was forty years ago) and he agrees to lend the money.

What actually happens? Well, you get a statement or some sort of paperwork that shows a negative balance of £10,000 and the car dealer gets a similar document showing a credit balance of £10,000 and you drive away in your car.

That’s it. No depositor’s money, no cash, nothing else.

So I hear you ask, if it is so simple why do banks even bother taking depositor’s money?

The answer lies in the fact that we do not live in a perfect world and people default on loans. In the example above, provided you pay back your loan there will be no problems but ultimately a proportion of loans will go bed.

Even then, if the bank does not tell anybody (does not ‘recognise’ the bad debt) then there is still no problem. Eventually however they will have to recognise these debts and for that purpose they hold reserves.

Therefore it is the size of these reserves (which are determined by regulation) that govern how much lending the bank can do. This is another way of saying how much money banks are allowed to create in the economy and ultimately where money itself comes from.

bigadaj

Freecall, like that simple explanation. It slightly ignores questions of liquidity and the issue of confidence, the latter largely doing for. Northern rock for example.

The question that springs to my mind is that the accounts will need to be signed off by auditors; I suppose the auditors would say that they don't know the internal dealings of the bank business but they do sign to say they believe they are a true and accurate record of the finances of any company.

As you say it's regulation now that controls the banks dealings and failure of this which led to the 2008 crisis, as well a a hubris on many levels.

antrobus

PeacefulWaters wrote: »

Hands up if you smell a conspiracy theory within 24 hours.

I'm betting on some variant of the 'fractional reserve banks create money put of nothing' rant, followed by lots of links to youtube videos.

bryanb

They photocopy any money you deposit - simples!

JohnRo

antrobus wrote: »

I'm betting on some variant of the 'fractional reserve banks create money put of nothing' rant, followed by lots of links to youtube videos.

Still clinging to the delusion they don't?