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Started By
Message
Where does the money come from when banks loan it out?
Posted on 5/15/14 at 1:55 pm
Posted on 5/15/14 at 1:55 pm
Thanks in advance.
11
Posted on 5/15/14 at 1:58 pm to Sleeping Tiger
Posted on 5/15/14 at 2:01 pm to Sleeping Tiger
Have you ever seen it's a wonderful life?
Posted on 5/15/14 at 2:10 pm to ell_13
Banks have some kind of system/formula where they can loan out every dollar in savings something like 8 times...I know nothing of it other than hearing that info.
I think they borrow from the some financial system which only charges them something like 1% and they loan it out as high as 9% (example)
That's why they give some accounts interest on deposits and cd's, etc...because they are using that money to back the loans they get to make loans to individuals and businesses.
I think that's the main reason you are hammered for cashing in a cd early. That money was earmarked to back their transactions...
I'm no banker, by a long shot, but in basic terms, I think thats close.
I think they borrow from the some financial system which only charges them something like 1% and they loan it out as high as 9% (example)
That's why they give some accounts interest on deposits and cd's, etc...because they are using that money to back the loans they get to make loans to individuals and businesses.
I think that's the main reason you are hammered for cashing in a cd early. That money was earmarked to back their transactions...
I'm no banker, by a long shot, but in basic terms, I think thats close.
Posted on 5/15/14 at 2:11 pm to Sleeping Tiger
Posted on 5/15/14 at 2:27 pm to RickAstley
Money Multiplier Effect
Posted on 5/15/14 at 2:27 pm to GeeOH
quote:
Banks have some kind of system/formula where they can loan out every dollar in savings something like 8 times...I know nothing of it other than hearing that info. I think they borrow from the some financial system which only charges them something like 1% and they loan it out as high as 9% (example) That's why they give some accounts interest on deposits and cd's, etc...because they are using that money to back the loans they get to make loans to individuals and businesses. I think that's the main reason you are hammered for cashing in a cd early. That money was earmarked to back their transactions... I'm no banker, by a long shot, but in basic terms, I think thats close.
This. It's called fractional reserve banking. A bank can loan out all but 10% of its total deposits, for instance if a bank has $100M in assets it must only keep $10M on hand to give back to depositors at any given time. The other $90M is working for the bank at the interest rate it was loaned out under.
Banks can keep such low cash reserves because their deposits are insured by the FED (FDIC).
Posted on 5/15/14 at 2:36 pm to Swifty
Diversification of Assets
Posted on 5/15/14 at 2:37 pm to Broke
Peanut Brittle
Posted on 5/15/14 at 2:38 pm to Sleeping Tiger
Whenever I go to a bank, the only places I see money come from are the cash drawers and the ATMs. 
Oh, and those pneumatic tube things.
Oh, and those pneumatic tube things.
Posted on 5/15/14 at 2:40 pm to Walking the Earth
quote:
Oh, and those pneumatic tube things.
The suction cup of death?
Posted on 5/15/14 at 2:43 pm to Broke
Well that's the name it was patented under but I didn't want to clutter the thread with too much sophisticated financial lingo.
Posted on 5/15/14 at 3:05 pm to Sleeping Tiger
No need to fear... Benny will soon arrive and explain everything. 
Posted on 5/15/14 at 3:06 pm to Broke
quote:
Broke
Feeling a bit insightful today, eh?
Posted on 5/15/14 at 3:11 pm to Cmlsu5618
quote:
Feeling a bit insightful today, eh?
Just wanting to impart some wisdom on the common man today.
Posted on 5/15/14 at 3:17 pm to Sleeping Tiger
Parker Brothers.
Posted on 5/15/14 at 3:23 pm to ell_13
quote:
Have you ever seen it's a wonderful life?
This + the wikipedia entry on fractional reserve banking pretty much tell you all you need to know.
Posted on 5/15/14 at 3:31 pm to Sleeping Tiger
Community banks lend out their deposits and usually have a loan to deposit ratio of less than 100%, so there is no need for them to get financing. The bank also has equity built up, which would allow them to exceed 100%.
The financial complexity increases as the bank grows larger. The typical progression is.
Senior Bonds
Subordinated bonds (multiple issues and subordinations)
Preferred Debt (multiple issues)
Equity
The financial complexity increases as the bank grows larger. The typical progression is.
Senior Bonds
Subordinated bonds (multiple issues and subordinations)
Preferred Debt (multiple issues)
Equity
Posted on 5/15/14 at 3:40 pm to TheHiddenFlask
None of them ever go to the Fed though. Never.
Posted on 5/15/14 at 4:05 pm to Iowa Golfer
quote:
Never.
Ever. For magical electronic money.
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