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# [Simple Terms] Is this how banking works?

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1. Due to the way banks to lend money at a 10:1 ratio.

For a simple example, a bank has £10 in the vaults and person 1 needs to borrow £100 - at 10% interest rate per year. The bank needs to borrow £90 so it can then lend the £100 - the bank will pay a lower rate of interest 5% for argument sake. The person borrowing the money will pay £20 per year (£10 interest, £10 of the capitol) thus lowering to £9 in year 2 in both cases, £8.. until the debt is repaid + interest on year 10. The amount the bank made is 10+9+8+7+6+5+4+3+2+1 = £55 over 10 years.. or £5.50 per year. Let's presume the bank has the same arrangement at 5%- so costing £2.25 per year. Not bad for the bank, it has profited £2.25 each year on average from having just £10

Am I close?
2. (Original post by Iknowbest)
Due to the way banks to lend money at a 10:1 ratio.

For a simple example, a bank has £10 in the vaults and person 1 needs to borrow £100 - at 10% interest rate per year. The bank needs to borrow £90 so it can then lend the £100 - the bank will pay a lower rate of interest 5% for argument sake. The person borrowing the money will pay £20 per year (£10 interest, £10 of the capitol) thus lowering to £9 in year 2 in both cases, £8.. until the debt is repaid + interest on year 10. The amount the bank made is 10+9+8+7+6+5+4+3+2+1 = £55 over 10 years.. or £5.50 per year. Let's presume the bank has the same arrangement at 5%- so costing £2.25 per year. Not bad for the bank, it has profited £2.25 each year on average from borrowing just £10

Am I close?
Pretty much.
3. Ok i thought this was basically how it would work.

This £10 that was originally in the vault i.e. a gold coin to the value of £10 (nicee)

The money it borrows would be fiat currency due to not having the capital to purchase £90 in commodities.. at this point.

The Interest or profit of £2.25 per year would also be fiat currency due to the person paying the loan back not paying it back in any commodity...

So after 10 years the bank now has £32.50 in the vaults consisting of a £10 gold coin and £22.50 in fiat currency. The bank should at this point purchase 2 more £10 gold coins.. making it £30 in gold coins and £2.50 in fiat currency.

Am i close?
4. (Original post by Iknowbest)
Due to the way banks to lend money at a 10:1 ratio.

For a simple example, a bank has £10 in the vaults and person 1 needs to borrow £100 - at 10% interest rate per year. The bank needs to borrow £90 so it can then lend the £100 - the bank will pay a lower rate of interest 5% for argument sake. The person borrowing the money will pay £20 per year (£10 interest, £10 of the capitol) thus lowering to £9 in year 2 in both cases, £8.. until the debt is repaid + interest on year 10. The amount the bank made is 10+9+8+7+6+5+4+3+2+1 = £55 over 10 years.. or £5.50 per year. Let's presume the bank has the same arrangement at 5%- so costing £2.25 per year. Not bad for the bank, it has profited £2.25 each year on average from having just £10

Am I close?
Not really. If you need to borrow £100, you end up signing a contract that is a promise to pay the bank back + interest. That in itself has a value and can be bought and sold for profit, or used as collateral to lend more money. This is a great video explaining how the banks effectively make money out of thin air.
Even the bank notes we take for granted are not actual money. They are simply a promise, and IOU to pay the receiver of the note the value of that note. Each note says something like "I promise to pay the bearer of this note the sum of ten pounds" for example.

More explanation in this excellent video

5. (Original post by Iknowbest)
Due to the way banks to lend money at a 10:1 ratio.

For a simple example, a bank has £10 in the vaults and person 1 needs to borrow £100 - at 10% interest rate per year. The bank needs to borrow £90 so it can then lend the £100 - the bank will pay a lower rate of interest 5% for argument sake. The person borrowing the money will pay £20 per year (£10 interest, £10 of the capitol) thus lowering to £9 in year 2 in both cases, £8.. until the debt is repaid + interest on year 10. The amount the bank made is 10+9+8+7+6+5+4+3+2+1 = £55 over 10 years.. or £5.50 per year. Let's presume the bank has the same arrangement at 5%- so costing £2.25 per year. Not bad for the bank, it has profited £2.25 each year on average from having just £10

Am I close?
In much simpler terms, a banks revenue is the difference between the rate it lends at and the rate it borrows at.

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6. (Original post by Esoteric-)
In much simpler terms, a banks revenue is the difference between the rate it lends at and the rate it borrows at.

Posted from TSR Mobile
OK.. but a bank is able to borrow out, money they do not own.. ie £10 in the vaults (in value) but is able to borrow out £100 and create a revenue, from this amount. So actually 90% of the "profit" is from nothing?!
7. ^ more or less.

Try not to look to hard at how banks do their financials its little more than a load of jiggery pokery when you get down to it; phntom holdings, off balance sheet liabilities, paying themselves loan etc..

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