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bogbrush

Banking Experts Please Advise

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Right, as part of some business investment plans I want to borrow a few bob from a bank and will be talking initially to my friendly neighbourhood Relationship Director. He's not a bad guy personally and I've known him for years so I can say much what I like to him without really upsetting him (I'm a nice guy, as you know).

I anticipate a load of guff about market conditions from him to justify higher margins and want to respond - amongst other things - along the lines that he has little or no significant costs since he will not be borrowing the money to lend to me from anywhere, he'll be conjouring it up from my promise to repay. The whole "money as debt" thing.

Although I think I fully understand the mechanisms I don't want my fun to be spoilt by being wrong in any way at all, so I'd appreciate it if anyone who really knows briefly confirming what obligations he might have lying behind extending a reasonably sized "loan". I don't want to be told to string the ******* up by his balls; or that all bankers are baby eaters; we all know this and I just want some fun.

Also, please no links to sites or whatever; I've done that and am just looking for affirmation or otherwise from intelligent, knowledgable people. Failing that I'll settle for what I can get on HPC. :lol:

I will return in a few weeks to the thread and relay the discussion, if anyone is interested. It would be a real life response of a senior regional bank guy to the money message, which might be entertaining.

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Oh, but he DOES have significant costs....the loss of value of his "assets"... the interest rate margin is only part of the equation.

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Right, as part of some business investment plans I want to borrow a few bob from a bank and will be talking initially to my friendly neighbourhood Relationship Director. He's not a bad guy personally and I've known him for years so I can say much what I like to him without really upsetting him (I'm a nice guy, as you know).

I anticipate a load of guff about market conditions from him to justify higher margins and want to respond - amongst other things - along the lines that he has little or no significant costs since he will not be borrowing the money to lend to me from anywhere, he'll be conjouring it up from my promise to repay. The whole "money as debt" thing.

Although I think I fully understand the mechanisms I don't want my fun to be spoilt by being wrong in any way at all, so I'd appreciate it if anyone who really knows briefly confirming what obligations he might have lying behind extending a reasonably sized "loan". I don't want to be told to string the ******* up by his balls; or that all bankers are baby eaters; we all know this and I just want some fun.

Also, please no links to sites or whatever; I've done that and am just looking for affirmation or otherwise from intelligent, knowledgable people. Failing that I'll settle for what I can get on HPC. :lol:

I will return in a few weeks to the thread and relay the discussion, if anyone is interested. It would be a real life response of a senior regional bank guy to the money message, which might be entertaining.

you miss understand... he wont be conjuring up new money, he will be lending money that his bank has on deposit. Money/debt is created every time money is deposited lentout and redeposited, but even to the bankers it isnt obvious how money is created The bank certainly doesn't create money, the person who borrows money creates it by borrowing someone elses money, in the same way you create money when you write a cheque, or borrow a tenner off a mate.

Edited by moosetea

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you miss understand... he wont be conjuring up new money, he will be lending money that his bank has on deposit. Money/debt is created every time money is deposited lentout and redeposited, but even to the bankers it isnt obvious how money is created The bank certainly doesn't create money, the person who borrows money creates it by borrowing someone elses money, in the same way you create money when you write a cheque, or borrow a tenner off a mate.

That's not true as I understand it.

Edited by bogbrush

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Oh, but he DOES have significant costs....the loss of value of his "assets"... the interest rate margin is only part of the equation.

Please elaborate.

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how much are you looking to borrow and what is it for?

Well it's up to £6m for plant, but the main thing is for me to be on safe ground about the nature of his work to provide the money so as not to be plain wrong. It won't change that I do a deal, it's more about the opportunity to quiz a banker about the nature of invented money.

VMR, if he'd come along I actually might :lol: (after I sort the deal out though).

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Please elaborate.

sure. banks these days have on their books, assets, financial assets, that they currently lie about the market value.

these assets are falling in value by the day. this is a significant cost to the bank, as they need to borrow just to make up the losses and remain solvent. QE is filling the cash gap, but interest earned on QE at the BOE is not covering the capital losses.

so lending to you and others has to have a: spare cash which costs, ( savers and other loans) and b:, recover a part of the losses the banks have incurred.

they are basically trying to trade through the enormous deflation in asset values...its the only way.

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If it is Lloyds or RBS I would keep mentioning that he only has a job because of taxpayers like you and he should remember that.

I would also ask him this "So the government lends you my money (taxpayer) by buying shares to recapitalise your bank and you propose to lend it back to me and charge what? Can you justify that please?"

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sure. banks these days have on their books, assets, financial assets, that they currently lie about the market value.

these assets are falling in value by the day. this is a significant cost to the bank, as they need to borrow just to make up the losses and remain solvent. QE is filling the cash gap, but interest earned on QE at the BOE is not covering the capital losses.

so lending to you and others has to have a: spare cash which costs, ( savers and other loans) and b:, recover a part of the losses the banks have incurred.

they are basically trying to trade through the enormous deflation in asset values...its the only way.

Interesting. If I understand you right it's the cost of plugging the balance sheet because of falling asset values. If you confirm that I have it.

Separately though, the cost of my "loan" secured against a 100% reliable asset as a standalone business transaction - what's your comment reagrding his unique costs of faciliating that transaction?

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Interesting. If I understand you right it's the cost of plugging the balance sheet because of falling asset values. If you confirm that I have it.

Separately though, the cost of my "loan" secured against a 100% reliable asset as a standalone business transaction - what's your comment reagrding his unique costs of faciliating that transaction?

thats how I see it.

your individual account? sure, you see it that way, the bank will see you as part of a pool of potential with all the others.

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I think that this provides a nice explanation of banking:

Banking 101

Your main interest is probably this bit:

Banks make money by lending at a higher rate than they borrow. In the Planet Money example, the banks borrowed at 3%, loaned the money at 6%, for a spread of 3%. The difference between 6% and 3% is called the "net interest spread".

Banks report something a little different called the "net interest margin". The difference between the "spread" and the "margin" is because not all assets are loans (some might be held as cash for regulatory reasons). Net Interest Margin (NIM) is the interest earned, minus the interest paid, divided by total assets. As an example, Wells Fargo just reported a net interest margin of "approximately 4.1 percent".

Now look at how profitable a bank could be. If this bank had $100 billion in assets, and a NIM of 4.1% that would be $4.1 billion in annual profits before expenses and charge-offs - on just $10 billion in capital (Note: The diagram shows 10-to-1 leverage; many banks were levered 30-to-1 or more).

Of course the bank has expenses (all those nice buildings and employees) - and there are always charge-offs for loans that don't get repaid, even in good times. For reference, the Federal Reserve tracks the charge-offs by loan category here.

Banks have two main risks: interest rate risks and credit risks. Since banks mostly borrow short and lend long, they are exposed to increases in short term interest rates, and this would lead to lower NIMs. The credit risk is that too many of those assets will go bad (more on credit risks in the next post).

So, he'll tell you what rate you can borrow at, and you need to ask him what his average borrowing rate is, and then you'll be able to work out how much he's making from you, and you can think about whether that's justified,

Peter.

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thats how I see it.

your individual account? sure, you see it that way, the bank will see you as part of a pool of potential with all the others.

Ah, but that's his problem because I can deal with whoever I want. And I'm looking outside the country to places who haven't got empty balance sheets.

Thanks, appreciate the affirmation.

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Right, as part of some business investment plans I want to borrow a few bob from a bank and will be talking initially to my friendly neighbourhood Relationship Director. He's not a bad guy personally and I've known him for years so I can say much what I like to him without really upsetting him (I'm a nice guy, as you know).

I anticipate a load of guff about market conditions from him to justify higher margins and want to respond - amongst other things - along the lines that he has little or no significant costs since he will not be borrowing the money to lend to me from anywhere, he'll be conjouring it up from my promise to repay. The whole "money as debt" thing.

Although I think I fully understand the mechanisms I don't want my fun to be spoilt by being wrong in any way at all, so I'd appreciate it if anyone who really knows briefly confirming what obligations he might have lying behind extending a reasonably sized "loan". I don't want to be told to string the ******* up by his balls; or that all bankers are baby eaters; we all know this and I just want some fun.

Also, please no links to sites or whatever; I've done that and am just looking for affirmation or otherwise from intelligent, knowledgable people. Failing that I'll settle for what I can get on HPC. :lol:

I will return in a few weeks to the thread and relay the discussion, if anyone is interested. It would be a real life response of a senior regional bank guy to the money message, which might be entertaining.

Your "relationship manager" will have some flexibility but not much. In case its escaped anyone's notice banks are not keen on lending.

Essentailly if it's something they like they'll want probably something like 50% of the cost from you, they may want security and personal guarantee's. if you are married and your partner is a shareholder then they may want personal guarantees from them too. Normally they'll need property or other solid assets as security and second charges on property are becoming less and less welcome.

The basics of this are that its all one big game he'll want to lend as little as possible as a % with as high a margin as possible and with as much security as possible. If you have assets then it will be difficult to avoid pledging them.

I should think as long as its not a property based deal.. then something like 40% of the cost of the proposition will need to be funded by you, they'll want personal guarantees and will take security over any assets you declare to them.... they will have some margin flexibility but not much... a rate of around 6% would be "average" currently.

If its a property based deal then a lot depends on the quality of the tenants and how much they pay.. so its a different structure, the same goes for property development which would be different again.

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That's not true as I understand it.

There is a layer of obfuscation in the way.

Every time someone's money is deposited into a bank account, the bank gives it the same value as a freshly created one from the BoE. The trick is, someone's money might be a loan from another bank. Indeed, it might be another loan from the same bank, but a different account.

Example:

Bob pays in a £100 fresh from the government into Bank 1

Bank 1 then extends £97 of credit to Sid

Sid puts the £97 in Bank 2

Bank 2 then extends £94 of credit to Fred

Fred puts the £94 in Bank 1

Bank 1 then extends £91 of credit to Frank

How much money is in circulation at this point? £382, from a single £100 deposit. Rinse and repeat until that £100 has turned into about £3200 (with a 3% reserve). They can receive interest on all £3200, but they must also pay some interest to the savers.

The problem for the bank is, if £101 is withdrawn, they are technically insolvent - they never had any more than this, they just hoped that no one would notice. As most people leave their money in the bank, the rouse works and they get to rake in the interest. Besides, if they become insolvent the BoE will tend to bail them out anyway, especially if they have extended lots of credit.

Edited by Traktion

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I think that this provides a nice explanation of banking:

Banking 101

Your main interest is probably this bit:

So, he'll tell you what rate you can borrow at, and you need to ask him what his average borrowing rate is, and then you'll be able to work out how much he's making from you, and you can think about whether that's justified,

Peter.

But I thought he could loan money he never had? Just raise a credit secured against the asset of my promise. What does my promise cost him?

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Your "relationship manager" will have some flexibility but not much. In case its escaped anyone's notice banks are not keen on lending.

Essentailly if it's something they like they'll want probably something like 50% of the cost from you, they may want security and personal guarantee's. if you are married and your partner is a shareholder then they may want personal guarantees from them too. Normally they'll need property or other solid assets as security and second charges on property are becoming less and less welcome.

The basics of this are that its all one big game he'll want to lend as little as possible as a % with as high a margin as possible and with as much security as possible. If you have assets then it will be difficult to avoid pledging them.

I should think as long as its not a property based deal.. then something like 40% of the cost of the proposition will need to be funded by you, they'll want personal guarantees and will take security over any assets you declare to them.... they will have some margin flexibility but not much... a rate of around 6% would be "average" currently.

If its a property based deal then a lot depends on the quality of the tenants and how much they pay.. so its a different structure, the same goes for property development which would be different again.

No, the basis is no problem and nor is the willingness to lend. I can have the money, that's already agreed and all we have to do is pledge the asset against the loan as usual. I normally pay 1.2% above base and I know he's looking for 3%, but in my opinion he has no grounds for this other than that the banks aren't competing for lending and will back each other up to increase margins.

I'm interested in paying as little as possible for the loan and to do so want to argue the basis of his costs. If he just creates the money from my promise then he has no real cost. That's what I'm looking for comment on here.

Edited by bogbrush

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But I thought he could loan money he never had? Just raise a credit secured against the asset of my promise. What does my promise cost him?

If banks could do that, why would we ever have had a banking crisis?

Your bank has to borrow the funds it lends you,

Peter.

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No, the basis is no problem and nor is the willingness to lend. I can have the money, that's already agreed and all we have to do is pledge the asset against the loan as usual.

I'm interested in paying as little as possible for the loan and to do so want to argue the basis of his costs. If he just creates the money from my promise then he has no real cost. That's what I'm looking for comment on here.

The bank's risk that you can't repay it. Of course, if they have your asset agreed as security, there isn't much they can lose. However, if your asset decreases in value, there is a chance that they will lose some capital if they are forced to sell it to repay their credit. Remember, they only have a small amount of capital to begin with, so any losses eat into that, having a knock on effect on all their other "loans".

So, if you can guarantee that your asset won't depreciate heavily and that they are guaranteed to get their credit repaid, they get a nice fat chunk of "free" cash and you get your credit.

Edited by Traktion

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But I thought he could loan money he never had? Just raise a credit secured against the asset of my promise. What does my promise cost him?

Yes, these guys arw describing fractional reserve lending whcih isn't used any more.

They simply give your signature a value and then "monetize" it these days. ofc "monetise" means "pretend to someone else you have fivers."

I don't use banks because it means becoming a thief.

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Yes, these guys arw describing fractional reserve lending whcih isn't used any more.

They simply give your signature a value and then "monetize" it these days. ofc "monetise" means "pretend to someone else you have fivers."

I don't use banks because it means becoming a thief.

Well, they are supposed to have a certain amount of capital adequacy and (voluntarily) agreed reserves.

While they can essentially just create any amount of credit, as long as it is less than their total (debt) asset value*, the problems kick in if the credit isn't repaid (and the selling of the possessed asset doesn't cover the shortfall). With the BoE hovering around, ready to top up your reserves if you become insolvent, it isn't much of a deterrent to just keep extending ever more credit though.

EDIT: *and they also aren't taking on too much risk, as reflected in the capital adequacy levels, as dictated by the Basel Accords.

Edited by Traktion

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Well, they are supposed to have a certain amount of capital adequacy and (voluntarily) agreed reserves.

While they can essentially just create any amount of credit, as long as it is less than their total (debt) asset value, the problems kick in if the credit isn't repaid (and the selling of the possessed asset doesn't cover the shortfall). With the BoE hovering around, ready to top up your reserves if you become insolvent, it isn't much of a deterrent to just keep extending ever more credit though.

So with my promise sitting as an asset can they not simply credit money to my account that they never had and haven't borrowed. That is my understanding and I'm surprised how many responses on here have told me that isn't right. How do you see it?

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