How does a bank actually work?

February 13, 2019

The bank should do good with the money.

Of course, anyone who brings their money to Bank has special expectations. But how exactly does it work? The real relationships and mechanisms of action between banks and their customers, customers and members and within a bank are extremely complex. Nevertheless, this article attempts to explain the relationship between customer deposits and the provision of customer loans in a very straightforward manner.

Like every bank, Bank publishes annual accounts and a management report every year . The assets and liabilities side are in the balance sheet. The liability side shows where the bank gets the money from. At Bank, these are mainly customer deposits and shareholders ‘equity, which consists of the members’ business credits. The asset side, on the other hand, shows how the bank uses the money, how much of it it allocates, for example, as loans to customers.

The task of the bank is to bring these two sides of the balance sheet into a good and economically sustainable balance. It provides the money that clients invest in the form of loans or credit to the people who need capital to implement their ideas. Thus, it takes on the function of a connecting bridge or an intermediary. It is about balancing the interests of the different customer groups and the members of the bank. From the perspective of the bank, however, customer deposits are not the same as customer deposits. Depending on the maturity of the investment, they are “valuable” for the management of the bank and for the possibility of granting new loans.

Given the current, very low interest rates. many customers choose to invest their money only on short notice and transfer it, for example, to a money market account. On the other hand, borrowers are understandably interested in longer maturities with low interest rates. In this mixed situation of conflicting interests, the bank must now balance and decide how much money they can lend in terms of maturity in terms of credit, ie the asset side. Here, the decisions of investors who decide to invest their money in long-term savings or savings bonds, have a positive effect. The longer funds invested in the bank, the more long-term (in simplified terms) the bank can also lend. The Bank is always committed to balancing maturities on the assets and liabilities side.

Bank generates its income mainly from the difference between the different interest rates borne by the borrowers and the interest that they pay to the savers. It basically excludes speculative transactions. If the interest rate level rises, this means that the new, higher interest rates can be calculated for new loans. However, the previously concluded loans are generally not affected. The bank’s interest income, for example, is rising only slowly. On the other hand, interest expenses are rising faster, as many clients rely on short-term investments, which are impacted more quickly by changes in interest rates. That is why Bank has to incorporate these fiscal developments into its interest rates.

When calculating how much money the bank can really pass on as credit, various factors play a role. First of all, in the past, customer deposits have grown faster than lending in the form of loans. Bank aims to ensure that 70% of customer deposits on the assets side are also granted as customer loans. The other customer deposits are themselves created by them.

It goes without saying that all this happens at the Bank according to the usual positive and negative criteria and socio-ecological aspects. And so the circle comes full circle: Who brings his money to the Bank, thus makes meaningful projects and helps to that the world is getting a little better.

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