How your local bank works

The National Bank, Oamaru, built 1871: a prost...
The National Bank, Oamaru, built 1871: a prostyle Palladian portico on a neoclassical facade (Photo credit: Wikipedia)

We are always concerned about safeguarding things that are our own. So we insure our life, belongings and properties in a nearly futile discourse of permeating what is ours through time. Likewise. banks safeguard our money. The money we earn is under a constant threat of being lost to some external entity. Banks cash on the fear of security among people and attract them with interest that they offer which idle cash cannot fetch for the people. Instead of hoarding cash, the salaried individual deposits their cash in the banks. The bank inturn directs the receipts as loans to the other parties that may approach them for money.

How your local bank works
How your local bank works

Loans are given on the basis of not what the reserves call for but on the notion of how the borrower may repay the loan back with interest. To seek the money out of the borrower the banks usually keep the property papers as collateral against the borrowings. The borrower may pay the bank in installments over a period of time depending on the purchase he makes. How the cash flows as loans into the hands of the borrowers from the depositors, these assets documents are also transferred by banks to other banks while they bring in some loans from the other bank. This way the hands keep changing while the money is being received and loaned out by the banks.

Deutsch: GE Money Bank, Filiale Orleansplatz, ...
Deutsch: GE Money Bank, Filiale Orleansplatz, München (Photo credit: Wikipedia)

It isn’t a worry that your hard earned money is being blown into the interconnected banking network because even while doing this the banks still manage to strike that point of equilibrium, the change is that they are now at an equilibrium, now at a larger scale which makes a  little over-all difference. If I bought a house for $1,00,000 and I settle in the house without my papers as I left the papers with the bank as collateral, the bank, suppose Bank A, gets itself a loan of $80,000 from Bank B by depositing my papers in Bank B. The chain can continue until I finally pay back my loan in my due period by when many banks would’ve profited from my papers but the banks can concede with this method only till there is no break in this flow because a minor flaw in this system of circulation can stall the whole banking network like it happened with the 2008 financial crisis.

You may also like:

Investments and Recession

The Budget Line

Understanding Interest Rates

Analyzing Choices while Buying

Cost Benefit analysis and Decision Making

Do we see the “Bancor” coming?

©The Idea Bucket, 2013. (Submitted my team-member, Mikky)

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