A Short, Sharp, Close Look at Ordinary Commercial Banking Profits – Tom Dennen
Even with the most cursory examination, lending can be seen as mostly a no-risk, ‘asset-secured’ business, in its simplest form seeing borrowers liable only for the original loan, which is secured against the borrower’s assets, plus interest.
When the loan is payed back, the bank profits in the accepted perception of what a bank does for a living – it gives low interest to depositors and takes a slightly higher interest from borrowers, their profit being the difference in interest rates.
When borrowers default, they yield to the lender whatever securities they’ve put up, which normally have asset values far exceeding that of the original loan.
The lender still profits.
In the case of mortgage loans, (Mort = death, as in ‘mortuary’ and Gage = bond) the home itself secures the loan, which over the 20-30 year payback period often returns more than 100% interest as the borrower pays back at least twice the amount of the original home loan he commits his working life to – and can lose at any time, no matter how much he’s paid.
So on the simple loan side, the lender gets his money back, plus interest.
In a default situation, he gets the securities against the loan which he sells off to pay back the loan.
In the Trillion-dollar mortgage market, he doubles his money.
This appears to be an almost totally win-win situation for the banks.
Astonishingly, that’s not enough! Instead of getting a small interest on their money, depositors actually pay banks to lend them their money today – it’s called a ‘deposit charge’ – which, along with all the other bank charges, means depositors see only between 80 and 90% of their income, when they used to see a small income from interest.
Things change… today’s problem with banks is their tendency to gamble:
By taking on the ‘moral hazard’ involved in the sale of debt derivatives, sacrificing long-term debt profit for today’s cash, they put the purchaser in harm’s way.
Their sale of ‘toxic’ derivatives, one of which is ‘securitized’ mortgage debts pooled with less secure, even unrecoverable debts and fraudulently labeled ‘Triple-A mortgage-backed securities’, led to the U.S. Sub-prime crash in 2008.
Step Right Up, Folks and pay, pay, pay…. we have hedge funds, Credit Default Swaps and many other chips in the game…
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Whistler Blowers, Insiders
What are you TALKING about? Banks do not – and cannot- loan out the depositors’ money. That is part of the “reserves” of the bank. They loan money that did not exist before they made that loan. It becomes money when the borrower deposits it in a bank. (It’s called “deposit creation” (of money.))
Their PROFIT comes from interest paid on money the bank created out of nothing.
You may have missed the Fractional Reserve part of the lecture… here’s some background for dummies…. /economy/2013/06/behind-obamas-visit-to-south-africa-money-2533584.html
“Fractional reserve” makes no difference, since every penny was created as someone’s loan principal. Bank A loans you what they created from nothing, and when deposited in Bank B, it becomes part of Bank B’s reserves. Bank B then loan out multiples of that amount, and the loans become the reserves of Bank C.
“Fractional reserve” makes no difference, because every penny was created as someone’s loan principal. The dollars created by a loan from Bank A become reserves in Bank B. Bank B makes loans for multiples of the amount. Those dollars become reserves in Bank C, and so on.
Exactly. the money is created “out of nothing” (which is somethikng only God can do and get away with (The ‘Reply’ button isn’t there after your last comment, Lifels… here’s the resume as it is in the ‘real’ world, fractional reserve notwithstanding:
Globalization: The unbearable simplicity of banking.
Briefly, lending is a no-risk, ‘asset-secured’ business, in its simplest form seeing borrowers liable only for the original loan, secured against the borrower’s assets, plus interest.
When the loan is payed back, the bank profits from the interest.
When borrowers default, they yield to the lender whatever securities they’ve put up, normally far exceeding the value of the original loan.
The lender still profits.
Most public loans are mortgages, where the home itself secures the loan.
But over the 20-30 year payback period – his working life – the home buyer often returns more than 100% interest as he pays back at least twice the amount of the original home loan. And he can lose his home at any time, no matter how much he’s paid.
So in the simple lending business, the lender gets his money back, plus interest.
In a default situation, he gets the securities against the loan which he sells off to recover the loan and should profit if he’s correctly valued those assets.
In the mortgage market, he doubles his money.
This looks like an almost totally win-win situation for the banks.
Depositors paying banks to lend them their money? Just more cream.
More than just arrogant, too – it seriously begs the question, why such cheap exposure to inevitable discovery and publiciiy, possibly prosecution?
Or does “that’s just the way it is” have enough power to prevent close examination?
The own the legal system, the media, the educational system… and us.
Is there a solution, any solution?
Localize the economy.
Start with Food Security:
Google Preppers, Permaculture, Transitional Cities and follow the links… the neurons of the Global Brain…