Sunday Mail discovers how banks work
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I’ve just posted a piece to SOYMB about the bank rate increase.
It’s certainly not an occasion for levity but if you didn’t laugh you would weep. So in that vein, shouldn’t we give Andrew baily, Governor of the Bank of England, three months free subscription to the Socialist Standard?If Banks can create money from thin air at a stroke of a pen, then presumably Credit Unions would be able to do exactly the same. If that was possible, we could all become credit union members could then create our own money and everyone could stop working, which demonstrates what a lot of baloney this moonshine economics is.
———————————————————————————–Many savings banks went on bankruptcy and the big commercial bank took over, and one of the biggest one was Washington Mutual and it was acquired by Chase Bank, before 2008 several savings banks collapsed. They did not create any new money, other banks and the state had to acquire them to inject more money. At the present there are only a few savings banks, before they were separate entities. Commercial banks attract savings customers by offering them better interest rates and better services. They are not creating new money they are looking desperate for depositors
Because I have a bank account with Nationwide, which is a “mutual” owned in theory by its members, like all other account holders I get their annual report and a chance to vote in it. This has just arrived.
It confirms what the papers said.
“Net interest income” was up from £3,562 million in 2021 to £4,498 million in 2022.
“Administrative expenses” only increased from £2,234 to £2,423 million. Result: profits went up from £1,597 to £2,229 million, an increase of 40 percent.That this will be due to interest paid to depositors increasing much more slowly than interest paid by those with a mortgage is confirmed by the fact that the the amount lent as mortgages increased by only 1.7 percent.
Anyone with an account with Nationwide can see the figures for themselves. They are on pages 21 and 22 of the booklet they will have been sent.
You also get a chance to vote on the salaries of the directors and top managers. The chairman got £525,000, the chief executive £889,000 and another executive £690,000. Nobody’s labour power is worth anything like that. They are creaming off a share of the profits. I always vote against.
https://www.bbc.com/news/business-64951630
A Banking crisis. During the 1930 around 9000 banks failed, and they kept all the money from the depositors. Why they did not turn on the money printer ? The new deal did not exist in that time, there was not depositors insurance
https://www.federalreservehistory.org/essays/banking-panics-1930-31
Banks are fighting to keep to deposits. Bank compete each other to find depositors. According to some wise guys they can make money from the thin air . The same banking rules, and schools of banking and finance contradict their false theory
“Many lenders this week revised down their estimates of a key measure of profitability, net interest income, which shows the difference between what banks earn on their loans and pay to attract deposits.
Executives said they expect these margins to get smaller in the second quarter because they are paying more to bring in deposits as the fight for funding gets more competitive across the industry.”With facts like these, refuting the thin air school of banking is like taking candy from a baby or maybe like kicking a person when they’re down. But why not, it’s what these confusion-mongers deserve.
The situation of banks in Britain is different from that of those in the US in that they have not had to compete so much for deposits. Depositors have stayed with them, allowing them to have a bigger “net interest” margin and so bigger profits. How long this will last is another matter.
https://www.usatoday.com/story/money/2023/07/26/fed-interest-rate-hike-live-updates/70463418007/
US Federal Reserve Bank interest rate hike
WASHINGTON – Despite a recent pullback in inflation, the Federal Reserve raised its key interest rate by a quarter point Wednesday and signaled another hike is at least on the table, if not likely, in coming months amid a solid economy.
The move nudged the federal funds rate to a range of 5.25% to 5.5%, the highest level in 22 years.
British banks seem to be moving towards the situation of banks in the US of having to put up the rate of interest they pay savers so as to retain them.
Under the heading “Barclay’s slides as margins come under new pressure”, today’s Times reports the bank’s financial director as saying:
“Customers are seeking higher yields for their savings and we have changed our pricing in response.”
No only that, many of those they lend money to to buy a house or flat are repaying their loans quicker, so reducing the total income from these loans:
“She said that more than a quarter of customers with home loans were overpaying to reduce their borrowings before remortgaging’”
So their “net interest margin” (“a measure of the difference between what a bank earns from loans and pays to depositors”) is being squeezed from both ends. As this is the source of their profits after paying their running costs, their profits are suffering. As a result the price of the bank’s shares have slid as more investors sell than buy them.
Banks of course are in business to provide an income from their shareholders.
The Competition for Bank Deposits Requires More Than “Rate Ads”
Banks are competing to retain depositors
Bank leverage high cost products to attract deposits as competition intensifies. All this management maneuvers completely destroy the concept that banks make money from the thin air
Bank of England series, Banks in turmoil
Workers Party of Britain
https://www.bbc.co.uk/news/business-67016375.amp
So another bank is in trouble. Metro Bank needs to raise more capital but, if banks can create money out of thin air, why don’t they just do it and their problem is solved?
Although the problem hasn’t been caused by depositors taking their money out — this seems, rather, to be a consequence — note the matter of fact way that financial journalists accept that depositors are important to banks. Here’s Patrick Hoskins, their financial editor, in today’s Times;
“All banks … are ultimately unstable entities, relying on the continuing confidence of their ordinary depositors to function. Metro is 81 per cent depositor funded and had £115.5 billion of outstanding deposits at June 30.”
Looks like Warren Buffett is much better informed than the left-wingers and the money crankers, he also knows that there is “class war” and his class is winning that war, workers are supporting the capitalist class and they are counting on bread crumbs. If banks are able to produce money why do they need depositors and governments bail out?
The first bank failure this year in the USA occurred a few days ago:
Look at the reason:
“Republic First Bancorp was seized by Pennsylvania regulators Friday, following a failed deal earlier this year to infuse the Philadelphia-based regional bank with new funds, amid a decline in deposits and a struggling mortgage lending business.”
Those who believe and teach that banks create out of thin air the money they lend have a number of questions to ask themselves.
1. If a bank can create money by simply making a loan (such as granting a mortgage), how come its mortgage lending business can be “struggling”? Couldn’t it simply reduce the rate of interest it charges and attract new borrowers that way?
2. If a bank can create money out of thin air, why would it need depositors? They would just be a drag on its finances through having to pay them interest? Why would a decline in depositors create a problem? It ought to improve a bank’s financial situation as there’s less interest to pay savers.
3. If a bank doesn’t need outside funds, how come that it can be saved by an infusion of funds from outside? Why would that make a difference?
Basically, a bank’s business model is to borrow money at one rate of interest (from depositors or other financial institutions) and lend out a part of that at a higher rate of interest; its income being the difference between the two.
So, the amount of funds a bank has or can get limits the amount it can lend and so its income. Similarly, if a bank can’t find borrowers (because the rate of interest is too high) then its income is reduced. That’s how a bank can get into trouble.
Every bank failure shows the absurdity of the Thin Air School of Banking yet it still won’t lie down.
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