It's been said over and over again that banks borrow at say 1% and lend at say 5% and therefore their profit is made on the difference. So far, I haven't seen any information to the contrary. Correct me if I'm wrong.

However, under a fiat currency system, banks don't have to have all the cash on hand. As long as sufficient liquidity is available, say in the form of treasury notes, they are allowed to lend say up to 10 times that amount. So therefore, we can extract the following:

For a mortgage of $100 000.00 at 5% for 25 years, the borrower will make monthly payments of $581.60 or $6,979.20 a year. The bank, however, because they only have to have a tenth of that amount, will only need to have $10,000 in the form of Treasury notes that gives them say 1%. And let's consider that the banks give virtually no interest on their customers' account used to finance the purchase of Treasuries.

Well, what gives... you get $6,979.20 from your borrower + you get $100.00 in interest from your Treasury notes (assuming 3 months notes), so that would amount to say $6,999.20 out of the $10,000.00 that you only need to have on hand in the first place.

That's not 4% (the difference between 1% and 5%), but that's 70% interest a year ($6,999.20 receipt for the $10,000.00 you only need to have).

Also, if you consider that your purchase of Treasuries is financed using your customer bank accounts for which you give virtually no interest, well... that is free and positive cash flow!

I want to be a bank.

© 2004 Bernard Malouin
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Bernard Malouin
Montreal, Quebec, Canada
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