Thursday, December 12, 2013
The Banking Mechanism
Rightyho
A few people have DM'ed me asking for a brief overview of how it all works, so with a little wiggle room here's my take:
Savers deposit funds into a Bank, and Investors buy shares in a Bank
Savers give money to a safe financial body, one that likes to sit in buildings with big columns grand impenetrable stone walls and resolute stoic doors at the front.
A Bank being a company that likes to portray itself as strong, secure, robust. ( blimey, on a much smaller scale trading standards would have them over a barrel for misdescription....)
The Banks give the savers and investors a small return on their money, whilst keeping it safe
By keeping it safe I actually mean lending it to someone else who needs a loan, and charging a healthy and profitable return on it
Nowhere near the paltry (sorry, notional) return they give to their savers.
They also act as a repository of transient money, i.e. our wages.
Example: so our employers pay us lets say £1000 this month from their BANK account to our BANK account, and we call this payroll, we've earned our wages, and we're damn well going to spend 'em.
We then pay our Mortgage ( don't get me started on that ) and our bills and liabilities, by transferring our money from our BANK to someone elses BANK. ( Cards, finance, food, entertainment, christmas pressies )
Getting it yet ?
Everybody's money moves, except the Banks.
The Banks then use all this lovely money sloshing round their system as security for whopping great loans, that they make to each other, this is called Inter Bank lending.
The rate these Banks pay to each other is set by LIBOR, the London Inter Bank offer rate, which might explain why some of the Banks were so pissed off when others were manipulating that rate.
So the Banks take your money and turn it, realise a profit, share some of that profit with savers and investors, and park the rest in the coffers to distribute to shareholders, key staff, and of course the Directors ( pension funds are always popular )
Money caught in this loop is cyclic, it just keeps going round and round.
The Banks also use some of their profits (growth) to act as security when underwriting or guaranteeing financial products such as life insurance, assurance, debt and term investments.
They use this, and their "Secure Brand" to entice people to invest their money in different ways, pensions, ISA's and other financial devices - all designed to keep the money sloshing around their system, and in their 'loop'
The more money they make from these products, by sharing less with the customer of course, the more investors want to buy their shares, which drives the share price up ( supply and demand ) which values the Bank more highly, which they can borrow against.
Oh, and lets not forget that each share bought has an original value that was deposited in that Banking business as a cash investment.
So, the more profit the Bank makes, the higher the share price, the more the Bank is worth, the more they can borrow, to turn for a profit.
The Banks don't make anything, they don't do anything, they don't contribute anything to the success of this country, but they have almost ultimate control over all of us, as they hold the purse strings. Politics, Media, Commerce and Industry all need cashflow, and if the Banks 'computer says no' then even corporate giants can fall.
Its all a rather silly game which came to an abrupt halt in 2008 when inter bank lending slowed to a trickle, and it beggars belief that here we are 5 years on and the Banks have got everyone criticising and pointing the finger at everyone other than them.
Lets face it, no-one likes a spoilt brat, but we've put ours in charge of the money.
Andy Tong
Profit Training Ltd.
12.12.2013
