How Do Banks Work? (#72)

How Do Banks Works?

Banks are said to be one of the most powerful financial bodies as they hold the power to change the look of the Economy by various means!

Have you ever wondered, how exactly do these Banks really work? ---- How & also Why would they pay 'US' interest? How is paying Us interest beneficial for them? & how do Banks earns, themselves?

So, here's an overview of the entire Banking System, answering/covering all the above mentioned questions!

So;

Banks basically tends to collect money from common people & actually we are the one's to deposit money for various reasons; now, it can be to keep our money safe &/OR simply to earn some interest on our money! ---- Banks don't really come asking for the money; We are the one's to go to'em.

& after depositing the money if we don't withdraw the money from the Bank for 1 year than we get; let's say 4% of interest, on that.

But how & why....

So, here's what really happened in the Background....

Well, as we know that the Banks give loans as well.

What do you think the money to give loans is coming from?

It's not the Banks! In fact, it's our // the common citizens money that they deposited!

Well, the thing is that; Banks lend our money for let's say 8% of interest rate. & hence.... out of which they pay us 4% yearly & the rest is their profit // income.

---- & this also answers the question of how Banks earns themselves.

So, you think that you're money is safe when you deposit it in the Banks.

So, yeah.... there isn't a room full of cash in Banks & neither is anyone's money kept in any of such places.

So, now you know why Banks runs out of cash even if you go to withdraw just a part of your entire deposit.

But still; our money is quite safe because, Banks have a leading role in this entire lending procedure.

That means; if for example a person who took a home loan defaults (fails to pay the loan's emi); then the Banks may quickly sell the house & recover the money to avoid losses.

So, this may kind of seem like a Win-Win situation.

But the picture wasn't quite similar to this "Win-Win" in the 2008 Crisis

Things didn't go like this 'cuz Banks were struggling to find buyers for homes 'cuz 90% of people have bought the houses via loans only & now they were all up for sale & no buyers out there. ---- & this caused the prices of houses to fall!

& Banks were out of cash!!

& so yeah, overall the 2008 Crisis was one of the worst financial crisis in history!

Read: The Great Recession/The 2008 Crisis Case Study! Everything You Need To Know Explained In Simple Terms!

Anyways, so.... That's pretty much it!

Hope you enjoyed reading this article!

Thanks For Reading!