måndag 10 oktober 2016

Financial institutes and how they create money (Banks)


I am trying to figure out how the different financial institutes earn their living.
Be sure to check out the other posts in this series:
Let's start with the ones closest to us: Banks

History

The idea of banking began some 4000 years ago in ancient Assyria and Babylonia. Over the years, they have picked up the different tools that they use today. Starting from loans, going to money deposits and exchange of currency.
The first banks that resemble the ones we have today started out in Italy some 400 years ago. So, how do the banks make their money today?

Money deposits

People and companies need someplace to store their money, and banks are the number one place to do just that. They happily take your money and hand out an I owe you certificate. Today that is the number you see when you login to your bank account using your favourite web-browser or app.

Loans

This is the traditional way for a bank to generate revenue. Lend someone some money and collect it back with an interest rate at a later pre-defined date and/or interval.

Transactions

Banks can charge a transaction fee for services rendered. For example for letting you exchange money from one currency to an other. A fee on using your credit card, or for paying your bills at the bank instead of online. Most of these fees are small, but with the amount of customers banks have and the number of transactions committed on daily basis, these revenue streams grow quite big.

Advisory services

People have no clue what to do with the money they have or don't have. How should they invest it? How should they finance their new home? It is hard to see the difference between an advisor and a salesman. This is a grand opportunity for a bank to sell you even more of their services.

Modern Banking

So, how do modern banks really earn money?
Today, banks don't just deal with money. They have incorporated many other financial forms in under the same roof. Get a better house loan if you move both your service and savings accounts over to them. And even better if you also get the insurances from the same place.
It is also common for a bank to have its own investment division. Meaning that your personal banker can advise (sell) you to invest in a product owned by the bank and thus generate even more revenue.

Tailored loans where interest rates are based on the credit worthiness of the subject allows for lower interest rates for those that are more likely to pay it back and higher interest rates for those that may not be able pay it back it full.

Investment banking

Are not the banks that you come into contact with as a consumer. Investment bank advisers primarily focus on corporations and help them with advisory services for a certain fee. They also trade in the market. I wan't to learn more on investment banks so I'll dedicate a post of its own to them.

Central banks

Central banks are connected to a country or group of countries. Their primary activity is to manage the stability of a financial region. They are more political than actual everyday banks. This is done by trying to control inflation with the help of interest rates.

Conclusions

When you start to think of the spiderwebs that banks weave around their customers, it is hard to see how people actually manage to have anything left at all. And in some cases, the banks owns everything.
But one thing is sure, banks will find ways to make money no matter how the market turns. But investing in a bank means that you have to live with profiting on other peoples losses. But not all banks are bad, it's just hard to find the good ones.

Sources

https://en.wikipedia.org/wiki/Bank
https://en.wikipedia.org/wiki/Loan
https://en.wikipedia.org/wiki/Bureau_de_change
https://en.wikipedia.org/wiki/Central_bank
http://www.investopedia.com/terms/b/bank.asp

Disclaimer. I am in no way an expert on capital management or investing. On this blog I only wish to share my findings, ideas and comments on current events and fields that interest me. I hope that my thoughts can entertain you. I expect that everyone reading take their time and do their own research before acting on anything read on this blog. Investing is not for everyone. E&OE.

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