Banks work with their customers’ money. They grant loans and have them repaid with interest. This is well known and often leads to the opinion that this is where the money for loans comes from. But this profit is only a very small part of the resources that are available to banks and credit companies. But where do the banks get the money for loans that they can make available to their customers on a large scale? Find out more here.
Versatility helps minimize the risks
Banks cannot make money. Like all other institutions and companies, you have to earn it first.
- The skilful creation of securities is only one possibility. The financial institutions employ a large number of competent staff for this.
- You can also earn good money by owning and trading real estate. Some of the buildings and apartments change hands by granting loans. Because anyone who receives money for loans from the bank has to deposit collateral. Among other things, this can also include real assets such as rare collections, valuables or real estate. In the event of insolvency, the contractually deposited deposit becomes the property of the bank. Clever action can greatly increase the financial assets of the respective bank.
- However, this is far from sufficient to be able to provide money for loans. It is therefore common practice for successful commercial banks to use no money at all for loans. This is so-called book or checking money.
What is deposit money?
Book money or commercial bank money is, as a claim for cash, a means of payment that can be used in banking by transferring a current account to a current account using bookings.
Simply put, deposit money is the opposite of cash. No cash needs to be provided for this. In the modern world, cashless payments are becoming increasingly important. Because now almost every adult who has legal capacity has his own checking account. In most cases, the money is also made available for loans. Especially when it comes to larger sums.
Sample calculation of how banks provide borrowers with money for loans
The following example clearly explains this. An investor provides his house bank with 5,000 dollars and receives 2.5% interest. That is 125 dollars. The bank is now lending this money in the form of loans for 5%. In doing so, however, it not only awards the investor’s 5000 dollars, but, let’s say, twice that, ie 10,000 dollars. The difference is made available to the credit company by the central bank in the form of book money.
An interest rate of 1% is due to the central bank. At 10,000 dollars that would be 100 dollars. The lender’s expenses of $ 125 and $ 100 are offset by income of $ 500. That corresponds to a net profit of 275 dollars. Admittedly, that doesn’t sound like much at first glance. However, if you consider that credit institutions let the money of the investors work several times and possibly achieve a return of 20%, the whole thing looks different. Because this procedure can quickly add up to another 20,000 dollars in cash.
And this with only one investor and an initial sum of 5000 dollars. It is not for nothing that an old saying goes:
“The stupid man is robbing a bank. The clever man founds one.”
Trading in credit from insolvent consumers
Yes, these can also be used to provide money for loans and even earn millions. Indebted and run-down loans often change hands. And everyone wonders why. The reason is quite simple. Banks buy up the “worthless” loans on a large scale, mostly through straw men. They are cheap, currently offered at an interest rate of mostly 5%. They are then written off as a loss, whereupon the security fund steps in as a guarantee. If 100 million ailing loans are bought for 5 million, the banks will receive around 45 million as a pure profit. Although this harms the economy, it supports the banking system as long as politicians do nothing about it.
What happens if a borrower can no longer repay the money for loans?
This also explains what happens to the loans that cannot be repaid. Even from them, the bank can still make a high profit, the amount of which increases in accordance with the number of loans issued. What can often mean financial ruin and even personal bankruptcy for the borrower is often a blessing for a bank that provides money for loans. Because this way you can earn twice with the suffering of your customers.