Which business borrows the most ?
Banks
If you want to set up a bank you need some money to start the business.
It is called the Capital Adequacy Ratio. In Australia it is 8% which means you need 8% in funds before you can borrow 92% from the public. The borrowing is in the form of fixed deposits and money in customer’s bank accounts. Or the bank borrows from the World Bank
In financial terms the Loan to Valuation Ratio (LVR) is 92%
Imagine that you want to set up a business similar to a bank and you go to your bank and say:
I have $8000 in the bank and want to borrow $92,000
What are you going to do with the money
I am going to lend to other people and charge 2% more than what you are charging me
Do you have any security like property or so
No, but I have $8,000
Do you think the bank will approve the loan
Not very likely but that is exactly what banks do
They put up a limited amount of money and then borrow the rest from you
Are the banks safe?
If 8% of the people want their term deposits back, the bank is bankrupt.
But the government on the advice of APRA ( see Session 8) steps in and says we must subsidise this dangerous business and guarantee some of the funds. We do not want banks to go bankrupt because that is bad for the economy , so let’s subsidise the banks so they can make more profits.
Any profit the banks make is multiplied 12 ½ times. So if the bank makes 1% profit they actually make 12 ½% profit on their own money.
A normal margin between deposit and lending rates is 2% so if you put your money in a term deposit or bank account the bank makes 25% on your money and you are lucky if you get 4% ( or nothing in your trading account)
Profitable business ?. I think so
Are Banks servicing the community ?
Just answer a few simple questions
Do Banks finance Community Projects
Do Banks finance Affordable Housing
Do Banks fund Infrastructure
Do Banks fund Charities
Do Banks service Regional Centres
Do Banks help new companies
Is customer service improving
Are Banks interested in servicing their customer
Are Banks interested in making a profit
Do Banks make a profit
Does government subsidise Banks
We all love Banks because they are safe and secure
I am looking forward to a phone call from my Bank Manager
You be the judge !