NormanH Posted January 17, 2009 Share Posted January 17, 2009 Would you disagree with this video then? (Link from ErnieY) Link to comment Share on other sites More sharing options...
Danny Posted January 17, 2009 Share Posted January 17, 2009 [quote user="Sunday Driver"]In very simple terms, banks raise money by accepting funds deposited on current account (eg, your monthly salary or pension), accepting savings deposits (eg, your nest egg) and by various other means. They then lend that money by making advances to customers on current account (eg, business overdrafts), by providing installment loans/mortgages, and by investing in marketable debt securities and other forms of money lending.That means they take MrsY's savings and pay her 3% for the privilege of using her money to earn a profit for themselves. That profit comes from lending that money to Mr X at 5%.The extent of bank lending is certainly governed by the amounts of their reserves - banking regulations require them to have sufficient capital/reserves to absorb losses without defaulting on their own obligations. That means that if they lose Mrs Y's money through Mr X defaulting on his loan then, if necessary, the bank can pay her savings back from their reserves.Of course, increased bad debts will have an impact on the bank's reserves and it's subsequent ability to cover it's funding position. When unrecoverable debts reach a certain critical mass, that's when Mrs Y's savings become at risk. I think that's the point that Scooby was making about containing potential losses.....[/quote]thank you SD. I was trying to highlight that banks don't just give out their depositor's money, they also create 'fictional' money based on their reserves. This is barely understood by a lot of people. I think the video in NormanH' post is most enlightening even if it doesn't go in to complexities.Danny Link to comment Share on other sites More sharing options...
Scooby Posted January 17, 2009 Share Posted January 17, 2009 So if it's only fictional money that's been lent to borrowers in default then there should be no need for any guarantee for savers. After all we haven't lent their money. Link to comment Share on other sites More sharing options...
Benjamin Posted January 17, 2009 Share Posted January 17, 2009 Maybe I'm not completely familiar with current regulatory requirements but I have very recent experience (Decmber 2008) of what is actually happening on the ground as far as property which is euphemistically termed as having "no upward chain".Again I can agree that a borrower should be held responsible for their debts but likewise it is incumbent upon the lender to satisfy themselves that they are lending money wisely. In the case of large earnings multiples being lent, 110% mortgages being granted and the turning of a blind eye to self certification then the banks have clearly failed to lend wisely.If you approach a professional you should be able to expect that that professional will give good advice taking your income and other relative information into account. If you borrow with that advice but subsequently discover that you are unable to meet the requirements do you think that the professional concerned should just walk away without any comeback because that is what is now happening with banks.What has been happening in the UK for some years now is that in the quest for ever increasing profits in the finance sector the checks and balances which should have been in place have been largely ignored. When the odd default happened "so what" was the attitude "we're making enough to write a few of those off",Then sub prime came along..........................................As an aside I started my banking career, along with all the other to be (very) senior managers on what was then known as the Remittance Desk. [:D] Link to comment Share on other sites More sharing options...
Danny Posted January 17, 2009 Share Posted January 17, 2009 [quote user="Scooby"]So if it's only fictional money that's been lent to borrowers in default then there should be no need for any guarantee for savers. After all we haven't lent their money.[/quote]Now thats a bit cheeky!!! Instead of answering my question and showing the benefit of your experience, you seem to gone somewhere else...I said "thank you SD. I was trying to highlight that banks don't just give out their depositor's money, they also create 'fictional' money based on their reserves" I didn't suggest that only fictional money was lent.Anyway, 'fictional' money starts to have the same value as any other money as soon as it is created. i.e.people use it to buy things or borrow on it and thus it becomes as real as money deposited at the bank. Or maybe you can better inform me?To answer your point, if the bank goes bust, where is the saver's guarantee then ? Danny Link to comment Share on other sites More sharing options...
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