How do banks generate income?

[stompix]

It is accurate, you have misunderstood. mocacinno is saying that banks create that money out of thin air, not that the money created does not exist. When commercial banks lend money by creating it out of thin air with a lower reserve ratio, in some cases 2.5% or even 0%, they are creating money out of thin air even though the money they send you is real.

Sorry, but what you describe it's still impossible and it's not fractional reserve.
When a bank lends you money for buying a house that money is directly spent as it leaves the bank to the previous owner, you can't do fractional reserves when you're paying money, you can only do that with reserves, that's why they are called so and not fractional loans.

Second, what happens when you're paying back your since this would mean the virtual cash gets erased and replaced by real money?  
Because otherwise, you would have a bank full of real money and virtual money back by nothing, when actually there is real money backing it up!

If my understanding of fractional reserve is correct, i might have explained it better....

I asked chatGPT for an ELI5 about fractional reserve banking in regards to the housing market, and this is what it came up with... To the best of my understanding, this is correct.
The bottom line is that, in this example, there was an initial deposit of $20.000 (for example, on somebody's saving account), and in the end the banks manage to lend out (and collect intrest on) $200.000 with only the $20.000 in the bank account to back up all those loans. The person with the saving account gets intrest on the $20.000 whilst all the borrowers have to pay the bank intrest on $200.000.

No, the bank is not making 200 000 out of 20 000!
Just as in the exact line you've quoted from the answer chatgpt gave you the banks sometimes loan 90% of the deposits.
So in your case with a deposit of 20 000, the bank will be able to make a loan of only 18 000!
For a consequent loan, it needs another step, which chatgpt mentioned one line below, the cycle, for that person to deposit the said loan in the bank, which, let's get real is impossible and it makes no sense at all.

So A deposits 20 000.
B takes a 18 000 loan and deposits 18 000 in his house seller account!
C takes a 16 200 loan and deposits 16 200 in his house seller account!
D takes a 14 580 loan and deposits 14 580 in his house seller account!
None of the house sellers are taking a penny out of the bank!
Do you see this as actually happening in any economy or at least in 1% of consumer spending?

But wait, it's not even the 10x loan-to-deposit ratios, that cause
We have A,B,C,D deposits worth 68 780 we have 48 780 in loans and we have still 20 000 in cash since nobody took money out of this scheme.

Furthermore, how is that different from you having 200 000 loaned to your friend with no fractional reserves?
You have loaned him 200 000 and you won the rights to the house, the bank is indeed 180 000 short in cash, but has 180 000 on the loan it has given out! So fast forward ten years from now when the guy pays back his loan, what happens to the so called virtual money?

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[tjtonmoy]

Banking is a broken system all over the world. They don't have their own money. They take people's money and then lend them out to others. Fractional banking system! And when everyone tries to withdraw all their money in mass, they go bankrupt. And then the inflation happens. Many knows this, many doesn't. Yet we have to use it for some situations because we are in need of it. They are wealthy to a certain point, but why do they go bankrupt? This is the reason, and it's harmful for the economy. Would people stop using it? No because we are still in need of it. But the usage will become less overtime.

[jostorres]

Financial institutions (banks) are responsible in handling financial issues, records, accounts and income of individuals, companies, churches and organizations. They respond promptly according to your demands on your accounts, they also have zero tolerance for fraud and are very security conscious, security intelligence and anti financial crime expertise but they've policies of not collecting dime from customers accounts yet banks are most wealthiest institutions on earth.

Yeah, they earn money from almost every single service that they offer, they are not doing anything, literally anything for free to their customers but they just make it look like they are doing something great for us and we are being provided VIP service for no cost at all, but what happens in the background is that they are charging us for almost everything.

If you only make an estimate of ATM cash withdrawal fees using another bank's card, you will realize that they earn millions or billions only with that in a year, so you can imagine how much they actually make with every other service they offer.

[mocacinno]

I'm not an economist, but the way i understood this from when i took my loan (how it was explained to me) boils down to

• Person A deposits $200.000 in his account.
• The bank sees this $200.000 and gives an $180.000 loan to person B, whilst the amount of money in the account of person A is still $200.000
• Person B sends to money to person C to buy a house from person C. Person C now deposits the $180.000 in his account
• The bank sees this $180.000 and gives an $162.000 loan to person D, whilst the amount of money in the account of person C is still $180.000
• Person D sends to money to person E to buy a house from person E. Person E now deposits the $162.000 in his account
• The bank sees this $162.000 and gives an $145.000 loan to person F, whilst the amount of money in the account of person E is still $162.000
• Person F sends to money to person G to buy a house from person G. Person G now deposits the $145.000 in his account

So... The actual initial money that was deposited (from selling something, from working, from investing,...) was $200.000

At this point in time:

• Person A has $200.000 in his account and gets 1% intrest per year (for example)
• Person B has a house that's worth $180.000 that's protected by a mortgage and is actually the property of the bank!!! it can be used to fill the hole left by the loan if he does not repay the loan. He pays 3% intrest per year (for example)
• Person C has $180.000 in his account and gets 1% intrest per year
• Person D has a house that's worth $162.000 that's protected by a mortgage and is actually the property of the bank!!! it can be used to fill the hole left by the loan if he does not repay the loan. He pays 3% intrest per year (for example)
• Person E has $162.000 in his account and gets 1% intrest per year
• Person F has a house that's worth $145.000 that's protected by a mortgage and is actually the property of the bank!!! it can be used to fill the hole left by the loan if he does not repay the loan. He pays 3% intrest per year (for example)
• Person G has $145.000 in his account and gets 1% intrest per year

So, from the net view of the bank:

• A has a positive balance of +$200.000
• B has a negative balance of -$180.000
• C has a positive balance of +$180.000
• D has a negative balance of -$162.000
• E has a positive balance of +$162.000
• F has a negative balance of -$145.000
• G has a positive balance of +$145.000

So, with one deposit of $200.000, at this point in time, person A,C,E and G have a total of $687.000
Person B,D and F have a total negative balance of -$487.000

A,C, E and G get 1% intrest whilst B, D and F have to pay 3%.
As long as B,D and F repay the debt, the final balance of the bank is fine. As long as not everybody withdraws the money in their balance, the housing market doesn't crash and everybody pays their mortgage, the bank cashes in bigtime: they pocket the difference between the intrest they give to the positive balance holders and the intrest payed by the negative balance holders on money they don't have at this point in time (untill the loans are repayed)... As soon as they don't, the system is in trouble

[davis196]

How do they make money?
* mortgage - using some billionaires account to buy housing properties and leasing them
* estate and lands with same patterns
* SMS alert charges
* Transfer charges
* Syphons dormant accounts or dead people accounts that are inactive with enough money in it.
* ATM and investment cards
* sales of currencies like dollar to naira
* preparation of international documents
* savings people's valuables like gold, certificate, court documents, WILLS, and so on.

I believe that the telecom companies are the ones, who are making money from "SIM alert charges".
The banks are making money from fees and interest rates, but I don't get one thing. What's the point of your forum thread?
Do you want to educate the newbies about how the banks work? Or you want to simply boost your post count, by creating forum threads, which don't offer any interesting information and cannot be used to start a valuable discussion.
I also believe that the banks cannot "syphon dormant accounts of dead people" because:
1.This is against the law.
2.The heirs are going to check if those dead people have any bank accounts with an active balance.

[stompix]

So, from the net view of the bank:

• A has a positive balance of +$200.000
• B has a negative balance of -$180.000
• C has a positive balance of +$180.000
• D has a negative balance of -$162.000
• E has a positive balance of +$162.000
• F has a negative balance of -$145.000
• G has a positive balance of +$145.000

So, with one deposit of $200.000, at this point in time, person A,C,E and G have a total of $687.000
Person B,D and F have a total negative balance of -$487.000

A,C, E and G get 1% intrest whilst B, D and F have to pay 3%.
As long as B,D and F repay the debt, the final balance of the bank is fine.

Exactly, and if it weren't for B,C,D,E,F,G  the bank would have had $200.000 and zero negative balances, which is exactly what $687k-$487k does at the end of the line. I like the ending, the bank is fine as long as, everyone that borrows the money pays back, this is quite interesting and I'm sure you will agree with it, as long as customers pay back their debts the banks are fine.
A scenario that will end badly in your friend's situation too if he decides he's not paying back the money you lent him while the housing market crashes!!

As soon as they don't, the system is in trouble

Don't you find it at least one bit ironic that almost everyone is angry about banks not guaranteeing their deposits and how the system is broken when the trigger is actually the people who took out loans that are not willing to give back the money they owe? I find it quite a lot more than just one bit ironic!

But anyhow, how could a bank that sets aside user deposits even work? How would they be able to give loans and why would they even pay you interest when they can't use that money and they have to keep it ready for withdrawal at any time? Why would they even take deposits at all?

[Litzki1990]

Financial institutions (banks) are responsible in handling financial issues, records, accounts and income of individuals, companies, churches and organizations. They respond promptly according to your demands on your accounts, they also have zero tolerance for fraud and are very security conscious, security intelligence and anti financial crime expertise but they've policies of not collecting dime from customers accounts yet banks are most wealthiest institutions on earth.

When we deposit money in the bank, the bank pays us a certain amount of interest based on our deposit. Now we may have a question why the bank is paying us interest.  After we deposit money in the bank, the bank doesn't keep that money, they invest that money in different places and they earn profit in different ways by using your deposited money and they give us some part of that profit. Most of the bank's income comes from providing loans to customers.

[Agbe]

Op what you have listed there are all correct. In 2013 or there about when Goodluck was a Nigerian President and he removed fuel subsidy to #75 naira which is also 0.16, and fuel marketers also increase their sales to a very high price to meet up their target, so retailers also increased theirs to make Profit so the final customers bought it with almost $2 and Economist analyst came to a TV show and said if the marketers collect #5 which is also $0.011 per litre, they can still make a huge amount of billions in every month.

So what am I trying to say about the banks here is that. All those changes they are collecting customers every day and some time rich and wealthy customers also give them millions of dollars to save their Wealth. There are some transactions that hang on the air and if the customer did not go and verify what happened for like one to two months time, they would collect that money to their personal accounts. There are different ways bankers make money from customers. Even they cut a little from your account, it's means a lot for them.

[348Judah]

Banks generate their income in many ways and most of which were being sourced for through our individual accounts with them, they make these deductiona in form of charges on many services they renders to us and the maintenance they make on our account, this is what you can't get in cryptocurrency because all this form of corperate extortions were made disabled in this new technology of financial system especially when you are dealing with bitcoin, tou have control over the amount you will be charged for performig a transaction and no maintenance fee on tour bitcoin or crypto wallet.

[benalexis12]

Banks make money off other people's money who trust them to hold other people's money. This means that if no one trusts to hold the money in the bank, the owner will eventually declare closure or bankruptcy.
But the more people trust them to handle the money that is not theirs, the more they will earn, because the bank has many ways to use the money that is not theirs to grow in different ways, such as what op mentioned in real-estate or stock market.

[Cuenta Alternativa]

Sorry, but what you describe it's still impossible and it's not fractional reserve.

10 years on the forum and you say that the system against which bitcoin was created is impossible.

The first result if you search:

Fractional Reserve Banking: What It Is and How It Works

Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal. Banks only need to keep a specific amount of cash on hand and can create loans from the money you deposit. Fractional reserves work to expand the economy by freeing capital for lending. Today, most economies' financial systems use fractional reserve banking.

When a bank lends you money for buying a house that money is directly spent as it leaves the bank to the previous owner, you can't do fractional reserves when you're paying money, you can only do that with reserves, that's why they are called so and not fractional loans.

If you don't understand that it's not money, but credit, even if you take out the bills and pay for the house with bills, it's not worth arguing about.

[ImThour]

Imagine there are two people, A and B.

A gives $1m to the bank to get an interest of 4% per annum.
B needs $1m, goes to the bank, and takes a loan at 11% per annum.

Bank makes 7% on this transaction. This is one example of how bank makes money.

[AicecreaME]

That's why I don't use bank, even in the future. Banks are lowkey milking their customers by sugarcoated words that they are going to make their money "safe" and by giving them "profits". Bank is the only one who does gets benefits from all their users, so I don't even see myself letting them handle my funds.

I'd rather invest it in Bitcoin and let it sleep while waiting for another All Time High. It's much more profitable and convenient for me.

[Aikidoka]

Imagine there are two people, A and B.

A gives $1m to the bank to get an interest of 4% per annum.
B needs $1m, goes to the bank, and takes a loan at 11% per annum.

Bank makes 7% on this transaction. This is one example of how bank makes money.

Indeed, banks generate a huge profits from people seeking loans which serves as a major source of income for them. It's rare to hear about banks incurring losses unless they become victims of hacking incidents or similar circumstances. Typically, as you said banks make their profits by charging interest on loans which is one of their primary revenue streams imo.

[Cuenta Alternativa]

Imagine there are two people, A and B.

A gives $1m to the bank to get an interest of 4% per annum.
B needs $1m, goes to the bank, and takes a loan at 11% per annum.

Bank makes 7% on this transaction. This is one example of how bank makes money.

No, that's not what it's all about. It is about the fact that with the million deposit the bank can create money (i.e. credit) out of thin air depending on the cash ratio. Typically 2 or 3%, but in more recent times even 0%, so that the money (credit) created out of thin air can be multiplied to infinity.

Why isn’t the Federal Reserve requiring banks to hold depositors’ cash?

The Federal Reserve Board reduced banking reserve requirements to zero in March 2020. Since that time, banks in the United States have not been required to actually hold any depositor money in the bank, making a flawed system — fractional reserve banking — worse.

In other words, you have to factor in all this money creation, which some people insist on denying, into the difference between the interest you get for depositing money in the bank and what you are charged for borrowing it. 

What some people insist on denying, even though he has been on the forum for 10 years, happens even in the ECB, which he seems to like so much:

Euro area countries

The European Central Bank sets minimum reserve requirements for all euro area countries that all financial institutions must comply with, calculated by multiplying the reserve ratio for each category of liability, which is therefore different for each type of deposit, by the amount of the aforementioned liabilities.34

Overnight deposits, deposits with an agreed maturity of up to and including two years or deposits redeemable at notice of up to and including two years. Debt securities with a maturity of up to and including two years. Money market instruments: Coefficient since 2012, 1 %.

Deposits with agreed maturity over two years, deposits redeemable at notice over two years or repos. Fixed-income securities with a maturity of over two years: Cash rate of 0 %.

Liabilities vis-à-vis other institutions subject to the Eurosystem's minimum reserve system or vis-à-vis the ECB and the national central banks: Excluded from the reserve base.

But of course, if you don't realise that in our financial system money is actually credit, how can you realise that there are reserve ratios of 0%.

[Cryptomultiplier]

Banks do sponsor programs on television or satellite broadcast and have been known to do profitable promotions, both to get more money and to add to their investment.
No doubt most banks also buy stocks and shares in bigger corporation and partner on huge profitable projects.
They are the money controller and can even delve into agriculture if that's where the next profit would come from. Of course they can use blank checks.

[Volgastallion]

The amount of biased opinnions here its beyond think.

The only one who have a good point and its in the correct path its @Cuenta Alternativa.

For not quote a ton of message im going to say a few things to clarify some missconceptions.

First of all, in economy we have TWO ways for make MONEY.

Primary money generation: This its in simple way the money who the goverment prints from mint.

Secondary generation of money : THIS its the money who """""generate""""" the private banks, in form of loans, BUT BUT BUT this money its ALWAYS controled by the CENTRAL BANK OF CTHE COUNTRY AND THIS ITS  A PERCENTAGE THEY KNOW HOW MUCH THEY CAN MAKE OF THIS MONEY.

Obviusly into this we have a ton of details maths etc. Im trying to make it simple.


About the second way of generation of money aka fraccional reserve, and also for the guy who put the example of guy A put and guy B take a loan and so on, its ok BUT again that its not exactly so free to do, and here im really ashtonishing in seeing some people who talks about BTC freedom and you forget the MAIN actor in economy and in this discussion?

ITs not privates banks, its CENTRAL BANKS and the GOVERMENT, man the privates banks dot give you the interest they want or the money they want, they onle took and give the money at X interest FIXED by the FED/CENTRAL BANK/GOVERMENT. And to give loans to people they need to have bank laces deposited into the CENTRAL BANK, to demostrate they are loaning the correct % of the second generation of money.

And YES in that way the private bank EARN money from them, if the FIXED interest put by the central bank its for example 10% they put the money on that rate at work and offer to his clientes a % below 10 percentage, it can be 9/8 etc.

The ammounts are enormous for that tha 1/2 % can be Billions trillions etc.

This its basic explanation.

[stompix]

When a bank lends you money for buying a house that money is directly spent as it leaves the bank to the previous owner, you can't do fractional reserves when you're paying money, you can only do that with reserves, that's why they are called so and not fractional loans.

If you don't understand that it's not money, but credit, even if you take out the bills and pay for the house with bills, it's not worth arguing about.

So you say that credit is not real money?
So if I take a loan from a bank, this loan is fake money, I buy a car from you the money you get is fake money?
Seriously, stop! The bank is loaning money that it has on deposit, it's real money, that's what's said even in the link you've quoted:

Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal. Banks only need to keep a specific amount of cash on hand and can create loans from the money you deposit. Fractional reserves work to expand the economy by freeing capital for lending. Today, most economies' financial systems use fractional reserve banking.

They lend you the money others have deposited, they don't make money out of thin air, the only thing that is wrong with this system is that the money the first person deposited is now tied to the ability of the creditor to pay back his loan, you even have mocacinno example above which should be as clear as the sky is blue!

10 years on the forum and you say that the system against which bitcoin was created is impossible.

No, I'm saying you don't understand the system for which Bitcoin was created as an alternative!
Obviously, it has its flaws because there is a need of trusting somebody and taking actions based on predicting future events like the ability of the borrower to pay back, but the rest is just an exaggeration.
Bitcoin eliminates the need for trust is a depositing scenario, it can't supplement the loan part in no way possible!

It is about the fact that with the million deposit the bank can create money (i.e. credit) out of thin air depending on the cash ratio.

How in god's name you create money out of thin air when you actually said it yourself you need 1 million $ first ?  

[terencio]

Banks make money ethically by providing financial services and products to customers and charging reasonable fees. Banks make money unethically by exploiting customers with hidden charges, unfair rates, fraudulent practices and risky investments.

[GeorgeJohn]

Do you know that your explanation doesn't match with the content of your theory or composition, but nevertheless I will like to brief us concerning the way bank's generate their own money, to start with money deposit in your account I was Left in the bank for years, do you know that use some of the money for personal business such as loan to real estate management, and banks generate their income through little fraction deducted from each of the transactions made by the customers, so makes uses your money for transaction business that brings or return much money, and that's the reason while banks like fixed account so that before the stipulated time agreed with the own of the money will reach, they have gotten surplus money with interest with the money.