Loan, deposit, payment service, which on is the most important for commercial bank?

The most important for a bank is the deposits.

From the deposits they can loan and create profit. Without substantial deposits the bank cannot sustain it’s required “asset or cash on hand model”, which could create a huge cash or shortage windfall.

Any bank is able to use roughly about 40% or so (I’m not quite sure on the actual percentage) to loan out to it’s existing or prospecting clientele. So in essence it works like this:

1. Tom deposits $ 100 dollars into his savings account with ABC bank.

2. ABC bank through the use of it’s actuaries and statisticians understand that Tom usually keeps $ 80.00 of each $ 100 of a deposit for 45 days in the account.

3. ABC then would lend $ 32.00 of the $ 100.00 to a current customer for a credit card collecting 20% annual interest.

4. ABC bank then pays Tom a hefty 2.00% interest earned on the $ 100.00. So if the bank is paying TOM 2.00% but collecting 20% what is the difference????

If you answered 18% your wrong. It’s actually 1000%, that they are making on your money.

Now here is where it gets somewhat tricky. Once the money is lent from ABC (essentially using TOM’s monies), to Linda for the credit card. When Linda makes the monthly payment. The bank would then in turn lend a % of Linda’s monthly payment to Barb for an auto loan.

And with each monthly deposit from Tom plus Linda, Barb’s and the other’s monthly payments. They in turn are lent to someone else.

However, if Barb or Linda would fail to make payment. Then the bank runs into an issue of not being able to turn that money over.

Any semi-efficient bank can have one person’s dollar in the hands of several people per month. It’s called “money in motion”. However, everyone is taught to keep your money in one spot for a very long time. Which in theory makes sense. But the reality is that Tom will never make money using an inefficient model.

All it takes for a bank to collapse is the following:

1. Tom goes against what the statistics show, and withdraws all his monies. But not just TOM, Barb and Linda do the same.

or

2. The media, from all the stories about a failing bank. Shows the report waaaaay too many times. So 20% of the customers withdraw monies from the financial institution. Well, once you demand a withdrawal banks need to give you the money. (Or SIPC depending on the situation).

So those two factors could easily break any successful banking institution in the United States within months. And again….

The Loan is where the bank makes it’s money. If this too is not handled properly (i.e, high risk loans or subprime loans or credit cards or 0% non profitable auto loans + high rate of default = total destruction.)

Why would a financial institution provide anyone with 0% interest for an extended period??? Because the monies isn’t necessarily there, or exchanging hands. It only exchanges hands when there is action which calls for the bank to do so.

Bank’s offer the 0% because they are hoping your checking account, savings account, auto loan, home loan and the others will follow as well. Therefore they can use those monthly deposits or payments to loan out to others.

So it is FEAR, GREED, LACK OF TRAINING, LACK OF EDUCATION that caused this huge financial downfall.

Keep in mind, CEO’s have been getting paid huge dollars for years. So why is it such a concern now? I’ll tell you why.

It’s the American why to blame other people for mistakes or issues that arise. It’s not the American way to figure out what got us in this mess, and do correct any mistakes that have happened. Just look at the stimulus bill. Nothing in it states on reviewing policies, procedures on how things operate. It’s only about injecting more money into a failed system.

If you throw enough money at anything, you can make it work in time. But what happens if you don’t have the money to throw at it??????? Which is where we are today.

Just my two cents.