Bankers earn more than interest margin on secured loans.

Bankers earn more than interest margin on secured loans

by tonytran2015 (Melbourne, Australia).

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(Blog No.39).


1. How much does a bank pay you?

When you deposit $100 CASH for a fix 1 year term at your bank you may be paid back $105 at the end of the year.

2. How much does the bank actually earn?

Suppose that some Mr. A may want to obtain a secured loan of $100 from the bank. He can obtain it provided he agrees that the bank can sell his $2000 motor-bike to get back its money if he does not repay the loan as agreed. Usually the bank charges Mr. A an interest of $5+$2 for 1 year loan. The bank bears no risk and they say that the extra $2 is their only profit.It does not actually give cash to Mr.A, but allows him to use something like a personal cheque book so that he can write cheques to pay others of up to $100.

Actually for each $100 of cash deposited, the bank makes 10 loans of that type to Mr.A. Each of the loan has its own security and is risk free. The total value of loans they give is thus 10×$100=$1000. (The ratio of deposited money over loan is typically 1 to 10 but it varies from country to country). The bank can do it as people usually just pass the personal cheques around like a kind of actual money, deposit them into their bank accounts and only 1 in 10 people actually demands cash from the cheque after a while!

The ratio of 1 to 10 is based on their average of millions of customers.

The different scenarios are given in the following.

If Mr.A borrows $100 cash from the bank and enjoys spending it then the bank makes $5+$2=$7 interest on the cash loan to him while it has to pay you $5 on interest and it only makes $2 as it claims.

But if Mr. A uses his cheque book then the bank can keep making other loans as long as the total value of the loans does not exceed 10 times the cash value it is holding. The following calculation shows how much the bank can make if the cash money stays with it for 1 year:

So the bank has 10 secured loans and earns 10×($5+$2)=$70. Its costs are only $5 interest payment to you, branch expenses and the salaries of its employees.
The worst case for the bank happens when all 10 out of 10 receivers of those personal cheques use them all for 1 year fix term deposits in the bank. In this case the bank pays out 11×($5)=$55 on deposit interests and collect 10×{$5+$2)=$70 on loan interests, and the margin of $2 takes on its meaning. However, this worst case rarely happens and even then the bank still makes $15 profit.

3. No bad debt problem.
In rough time such as during recession, maybe 10 out of 10 want to present every cheque to get real cash money. In such a case, the government would step in to limit cash withdrawals from banks to give banks time to disengage from their loans (This is a liquidity problem, not a bad debt problem).

Now you can see the real reason why India and a number of other countries simultaneously don’t want people to demand cash. They actually want to help their bankers (or banksters?) and may be preparing their economies for their own BIG DEPRESSIONS.

4. It is a nice earning hidden behind the claim of earning only $2 margin on your money! 

This is why bankers are so rich.

In theory, when people don’t withdraw cash, the bank has the capability to reduce their interest on secured loans down to ($5+$2)/10=$0.7!


Added after 2019 Jan 20:



Demonetizing in India robs the poor.

Preparing for cashless trading.

Cashless and negative interest go hand in hand.


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