The Unconventional Conventional, Part XXI
Updated: Aug 6, 2019
Before I start this weeks column there are two things that I would like to mention, the first, that I am slightly overwhelmed by the number of positive responses to the topics of my weekly writing, thank you very much to my readers, and second, please accept my apology for not keeping up to the task of writing my column for the last few weeks. Believe me, it is not about having nothing to say or write about as it is highly unusual for me to keep silent, ask anyone
that knows me even just a bit. In fact, I have been in anticipation of this column today for the last twenty-one days. Why, simply because I promised to share an exciting secret with you at the end of my last column. My last column was primarily about the business of the bank and how they make profits by paying you a lower return on the money you deposit so they can lend it back to you at a much higher rate and make huge profits. And if that alone does not bother you enough to make some noise and complain, just sit tight while you read the next few paragraphs. This should create quite a stir.
You see, the banks do not just make a profit on the money you deposit. Bank rules, which were written about in the Canadian Securities Course when I took it in 1991 talk about something called “banks minimum capital requirements”. See following link.
This is the minimum required amount of capital that the banks have to actually have to keep on deposit to provide liquidity to their customers for every day banking purposes. The best part, the rules are written by the bankers, for the bankers benefit, which means for the shareholders benefit. You see, the banks in Canada have to retain a minimum of ten percent of the deposits made, which is just a quick reference point as to the actual amounts based on a series of
calculations, again that the bankers wrote to their own benefit, which can be changed when required (read the above government document link which explains the whole deal, go on, I dare you) to suit their own agenda and then the rest of the deposit can be lent out for the purposes of making profits. Check this out:
To see how this affects the economy, think about it like this. When a bank gets a deposit of $100, assuming a reserve requirement of 10 percent, the bank can then lend out $90. That $90 goes back into the economy, purchasing goods or services, and usually ends up deposited in another bank. That bank can then lend out $81 of that $90 deposit, and that $81 goes into the economy to purchase goods or services and ultimately is deposited into another bank that proceeds to lend out a percentage of it.
The above paragraph borrowed from the link above the paragraph. This explains that the money deposited at any bank is redeposited and circulated again in numerous transactions. All designed to make larger and larger profits for the shareholders. So, now that you have a better understanding of how the banks make profits for themselves, can you not see that it is in your best interest to be a shareholder and not a depositor of any really good bank? There’s virtually NO risk in not making a profit most of the time.
Copyright 2013 Richard M. Kiernicki. All Rights Reserved.
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