Keeping In Touch With Some Basics As To How Banks Operate
Topics: Banks, investment, cash, liquid assets, reserve, ratio, money, securities, government bonds.
There are some people who may wish to know a little about what banks are all about, especially when these financial institutions have had to swim in rather troubled waters just lately.
Banks are here to make money. It is hard to manage without them, and it is hard for them to manage without us. On the face of it, this looks like a marriage made in heaven. However, since all marriages are based on absolute trust and hate turbulent situations, and because these two features seem to be coming into play, it is not surprising that this is causing a certain amount of concern to depositors.
Basically, a client places money into his account. The bank will lend that money to other clients and make a profit on the deal. If the client banked say $10000, the bank can lend $90000 out because they must maintain a 10 per cent cash reserve ratio. In other countries, the cash reserve ratio requirement can be higher or lower. Any country can decide to alter the cash reserve ratio if needs be.
There is nothing to stop a bank to set aside more than the required minimum, meaning having excess reserves. It is not particularly rewarding for banks to do this, since they get no interest on that money, albeit they can channel it out on short and overnight terms to banks which need to maintain their minimum reserve ratio.
Getting back to that $90000 the bank can lend out, and let us say grant overdrafts but creating of course a liability factor, as the bank has to pay out whenever the various borrowers issue their cheques.
The position of the bank is that it has a total cash sum of $10000 received.
However, it has lent out deposits of totalling $90000. Add this together and you get a figure of $100000 representing total assets which are the $90000 in overdrafts plus the original $10000 cash received, which of course includes the required 10% reserve.
What took place is that the bank granted loans worth $90000 giving birth to money which did not exist before, based on the $10000 received in cash and locked in the safe.
People do not put in all the money on the same day, and they do not take out all the money on the same day. Cash in form of bank reserves is there to meet some withdrawals that may possibly be required. Banks have been managing quite well with small cash reserves in their safe, because they hold a number of liquid assets which they can sell for instant money. It is better for them to earn more money out of these liquid assets than having cash. Bankers are clever enough to know what kind of mixture of investments they should hold not to be caught with their pants down.
As well as lending money both short and long term, banks place investments in other areas. For instance, apart from the liquid assets, they can purchase long term government bonds and other securities. However, without cash reserves it is not possible to give birth to additional money unless breaking the rules.
Of course banking is far more intricate than that, but at least one can grasp some basics, and understand why, when a spanner is thrown into the works due to whatever reason, hiccups can follow.
Paul Dubsky is director of Foreign Currency Exchange Services Ltd. The company is focused on being able to offer really friendly currency exchange rates and international money transfers www.foreigncurrencyexchangeservices.co.uk
Previous Articles Highlighter:
Some Scams You Will Find Within Home Based Businesses (1)
Or they may charge you to attend meetings or conference calls. Any sponsor who charges his downline to attend a conference call or meeting is a scam artist. What you really must look at before you join home business, is not how much money you think you will make.
Why Digital Photography Is Better Than Film (2)
Digital cameras usually come with a CD which is downloaded onto your computer. This allows you to download the pictures and look at them before you print them. Most of these programs also have an editing feature that allows you to edit your photos on the screen in front of you.
Tuition Reimbursement - Ten Things You Need To Know, Plus One Extra (3)
And by the way, application fees and test costs usually are your responsibility. Keep reading, it gets better, and you can go to college with this program. 7.
Why You Should Strongly Consider Getting Window Tint On Your Car (4)
Shop around and ask a lot of questions before you actually make a commitment financially. You will want to know how their work looks as well as how many windows they have tinted throughout the course of their enterprise.
How List Building Expert Made A Quantum Leap In His Income (5)
An interesting footnote to this case study is that Tellman Knudson didn't achieve his target of one million subscribers but do you think he cares? He is now a highly respected Internet Marketer known for his expertise in list building.
How To Choose The Right Colocation Center (6)
collocation, data center, datacenter Looking for a data center? This article is designed to provide you with some useful tips to consider when choosing a site to meet your colocation needs.
How To Choose A DSL Provider (7)
You would save on taxes, you would save on fees, you would save on stamps, and you could probably save a bit of money on your services as well. If you know someone who has had a bad experience with a DSL provider that you are looking into you might want to take that into consideration.
The First Year - Transitioning To Employment After Graduation (8)
Getting up at as early as six in the morning can be the worst part of your new working life. Obviously, in order to get up early you will have to cut short your late night parties.
Prepare For The Summer Sun With A Sun Shade (9)
Generally the garden umbrella is secured by a table that stops it falling or tipping over. This means it is a great option for when you want to have a meal outside on a sunny day but is probably not a great option if you want to sit on a comfortable chair or hammock in the shade.
Benefits Of Working In A Small Company Vs. A Corporation (10)
Tony Jacowski is a quality analyst for The MBA Journal. Aveta Solution's Six Sigma Online ( www.sixsigmaonline.org ) offers online six sigma training and certification classes for lean six sigma, black belts, green belts, and yellow belts.
Newer Articles Highlighter:
Pet Playpens Are Catching On (1)
Great for small breed dogs, the pet playpen is proving to a real live saver for folks with other small pets. From rabbits and ferrets to pot bellied pigs, there are several styles of playpens that may be just right for your particular pet.
What Is Digital Infrared Photography? (2)
For example, when used with a unique filter digital infrared photography can deliver incredible in camera effects that can produce very brilliant and artistic photographs. As such, this type of photography has a host of benefits associated with it that some may find appealing.
Foundation Skills For A Successful Career (3)
The next thing that you have to remember when you do follow-up is to have it done with every lead your contact gives you. If a particular person would just tell you that you call someone you know in the company, does not help you.
Creating Spin-Off Websites For Internet Income (4)
People like to learn about new things and quickly change their minds about a lot of topics. Increasing the flow of Internet traffic is able to be achieved through the startup of successful spin-off sites.
Having A Couple Of Home Based Businesses Can Make You Rich (5)
It will take work and effort to build your company. This is one of the main problems I see when people first want to start a business. They expect results and huge results to happen overnight.
A Great Tool For Increasing Your Personal Productivity (6)
It doesn't have to be this way. One of the best sales trainers I've ever heard says that failure is almost never due to lack of desire and almost always due to lack of training.
How To Choose The Right Formula Drifting Tires For Your Vehicle (7)
This article will discuss some of the most popular manufacturers to distribute drifting tires for regular vehicles. Nitto Tire Nitto Tire is one of the most popular tire manufacturers to create Formula Drifting tires.
Foreclosure Pitfall: Private Investors May Cost You Your Home (8)
Make a valid effort in protecting yourself from a home foreclosure if possible. There are is a growing number of real estate investors that would gladly place their money into your property in efforts to grow their financial portfolio.
Greening Your Child's Wardrobe (9)
Buy organic if the budget allows. Considering the cost of most organic clothes, this really won't work for every family. But it's worth mentioning. Besides, I figure that using used clothes means your clothes are pretty green right there.
How To Find The Proper Engagement Gift (10)
However, this is not an easy thing to do so ideas are really needed in such situations. Besides, the joy of their engagement is so big that you will hardly find a gift that can be really taken into consideration.
Permalink to Keeping In Touch With Some Basics As To How Banks Operate