10 things you need to know about banks

Ten things you need to know about banks. 

1. “Your” money in a bank belongs to the bank. When you deposit money in your account you are making a loan to the bank, in law the money becomes property of the bank. You have entered into a contract with the bank and they agree under the terms of this contract to pay you back the money you have loaned them when you ask for it. However they can default on this contract, at the moment the only guarantee that you will get your money back is via the government (taxpayer). This “insurance” scheme only covers you for £80,000 and deposits over this are unprotected. 

2. Banks can create money. If you loan money from a bank the bank creates the money electronically and credits your account. This has the appearance of creating money from thin air but in reality the money is created on the promise of the borrower to repay. This is because as soon as the loan is re-paid the money that was created is destroyed. Except of course the bank has charged you interest, where has that money come from? When you realise that before the crisis in 2008, 97% of all money was created in this way then the interest itself is also created as a loan for someone else.   

3. Banks cause inflation. By the processes above, each transaction carried out by the bank creates money, increasing the total amount of money in the system. As in any supply/demand situation if you increase the supply without an increase in demand the price will fall, so the value of the currency falls which is inflation. i.e. £1 buys less 

4. Banks gamble with depositors’ money. The largest 9 US banks hold $228 trillion of derivatives. A derivative is a legal bet (contract) that derives its value from another asset, such as the future or current value of oil, government bonds or anything else. E.g.- A derivative buys you the option (but not obligation) to buy oil in 6 months for today's price/any agreed price, hoping that oil will cost more in future. (I'll bet you it'll cost more in 6 months). Derivative can also be used as insurance, betting that a loan will or won't default before a given date. So its a big betting system, like a Casino, but instead of betting on cards and roulette, you bet on future values and performance of practically anything that holds value. The system is not regulated what-so-ever, and you can buy a derivative on an existing derivative. It was this sort of betting that brought the crash in 2008, and caused the bailout by the taxpayer of banks across the world. Be in no doubt, if the banks had not been bailed out by the taxpayer depositors would have lost their money (not withstanding government insurance mentioned above, but again taxpayers money). 

5. Banks can gamble on credit. The collapse of Barings bank was due to a rogue trader betting more than the value of the bank and losing. As stated above derivative trading is not regulated and even within banks regulating systems can be bypassed, there are many recent examples of traders betting more than the limits imposed on them by their banks. 

6. Banks regularly lose money gambling. A definition of a bet is that two sides take an opposing view of an event and when the event happens one side gains a financial advantage over the other. In other words when you gamble there is always a winner and a loser. Therefore if banks are gambling sometimes they will lose. Example – this from associated press 16th March 2013, WASHINGTON— Two former high-ranking executives at JPMorgan Chase faced tough questions from U.S. senators Friday about why the bank played down risks and hid losses from regulators when it was losing billions of dollars. The hearing was held a day after the Senate Permanent Subcommittee on Investigations issued a scathing report that ascribed widespread blame for $6.2 billion in trading losses to key executives at the nation’s biggest bank. 

7. Banks do not hold enough funds to repay all depositors. At any one time a bank only holds in liquid assets a fraction of the funds it “holds” on deposit. The amount a bank holds is calculated by “expected customer behaviour models”. This is why the biggest risk to a bank is a “bank run”, i.e. a situation where all the customers want their money back at once. 

8. High street banking operations make more money from charges than from loan interest. As seen in point one above when we pay money into a bank we are lending them money, it would seem fair that banks should pay us for the privilege of having use of our money as they do when lending to us. However interest on current accounts is now by exception, and for many accounts the customer is charged for lending the bank money. Banks now validate these charges by “adding value” such as mobile phone insurance; these services are paid for by the charges and commission paid by their commercial partners who gain access to the customers’ details. 

9. Banks use their privileged position to make profits. When a bank lends to you they check your credit worthiness. As an individual you have an “ordinary” credit position. A bank as a financial institution has a “privileged” credit position by way of its deposits and liquidity (funded by you!). This allows the bank to borrow cheap and lend expensive. This spread at the moment is at its starkest because the Bank of England is allowing banks to borrow at 0.5% but they are lending at a minimum of 5.1%. Of course some lenders are charging considerably more. 

10. There are alternatives to banks. If you feel that traditional banks are not the types of organisations you want to hold your money then look here for alternatives: http://www.moveyourmoney.org.uk/