RSPH Blogs - Finances!

  What Are Shadow Banks? What Do They Do & How Do They Work? (Examples) What Are Shadow Banks? Shadow Banks are financial institutions that perform bank-like activities — primarily channeling money from savers/investors toward borrowers — without being official, regulated commercial banks. Unlike commercial banks, they generally operate with lighter regulatory oversight, and aren't subject to the same requirements around capital reserves or deposit protections. Common examples of shadow banks include: Investment Banks, Mutual Funds, Hedge Funds, and Insurance Companies (in certain of their activities). → Related: How Do Mutual Funds Work? (#58) , What Are Investment Banks? (#73)** How Do Shadow Banks Work? How Are They Different From Commercial Banks? Shadow banks — mutual funds and insurance companies, for example — collect money from investors and customers, and rather than issuing loans the way commercial banks do, they typically invest that money into various financial in...

  How Do Investment Banks Work? What Are Investment Banks? An Investment Bank is an organization that partners with businesses to help them raise capital — while taking on much of the risk involved in that process itself. That definition will make a lot more sense by the end of this article — let's walk through what investment banks actually do. What Do Investment Banks Do? Say a company wants to raise funds quickly. It can approach an investment bank and ask it to find investors on its behalf. The investment bank goes out and finds suitable investors for the company, and — critically — guarantees both sides of the deal: the company that its shares (or bonds) will sell, and the investors that the company will follow through on its end. In doing so, the investment bank takes on real risk as an active participant in the deal, not just a matchmaker. This makes the investment bank a genuine intermediary between the buyer (investors) and the seller (the company). If either side fails ...

How Do Banks Work? Banks are among the most powerful financial institutions out there — capable of influencing the shape of an entire economy. But have you ever actually wondered how they work? Why do they pay us interest? How is that beneficial for them? And how do banks make money in the first place? Here's a straightforward overview covering all of it. Where Does Bank Interest Actually Come From? Banks collect deposits from ordinary people — money we choose to deposit, either to keep it safe or to earn some interest on it. Banks don't come looking for this money; we're the ones who bring it to them. If you leave your deposit untouched for a year, the bank might pay you, say, 4% interest on it. But where does that interest actually come from? Here's what's happening behind the scenes: banks also issue loans — and that loan money isn't the bank's own money. It's our deposited money, put to work. Banks lend that money out at a higher interest rate — say...

  What Is Fiat Currency? What Is Fiat Currency? Fiat currency is money that has no inherent physical value of its own — its value exists purely because people collectively trust and accept it, backed by government decree rather than a physical commodity like gold or silver. How Did We Get Here? The short version: money evolved from a barter system, to gold and silver coins, to paper receipts representing those coins (an early precursor to banking) — and eventually, those receipts became backed by nothing but collective trust and government authority, rather than any actual gold or silver reserve. → Related: What Is Inflation? What Causes It? (#28) — covers this history in more depth, including an important caveat: historians and economists actually dispute how literally the barter system functioned as money's true precursor, so it's worth treating that part of the story as a popular simplification rather than settled fact. The key idea: paper money is essentially a deri...