How Banks Crash – Debtfree Magazine


You “need money to make money”, that’s how the saying goes.

One of the main reasons why some banks have recently collapsed, is because of their heavy reliance, on borrowing money themselves, and then leveraging those funds to make money before they have to pay it back.

Banks do not have bank vaults full of gold, like in the old days. In modern times money is mostly 1’s and 0’s on a computer. In fact, you might even find that banks give people loans that are based almost totally on the promise of money that the client will eventually pay back. Still, banks are required to have at least some of the money they lend out or use.

Banks borrow money from depositors (their savings clients) and other creditors (like the Reserve Bank or bondholders) and then in turn, they use that money to grant loans and investments. This process is known as leveraging, and it can amplify profits when things are going well.

However, it can also magnify losses when things turn sour.

Since banks have borrowed money, they also have to pay it back. To do that, they need to be making a profit or they will have to borrow even more money to make payments back to their investors or the Reserve Bank.



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