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Ride_on

Banks Charging 18,000% Markup

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Just did a quick calculation after looking at my miserable saving return. Trying to look at banks in my-world terms of manufacturing.

I got just under 1% (before the additional higher rate tax to be taken) on my savings.

The bank takes my money and lends it out at 5-7%, so they are making a 600% markup (at 7%).

But then they lend the same money to about 30 clients, so its 18,000% markup. :angry:

I thought retailers where inefficient and greedy charging 100% markup. Manufacturers are lucky to get 15-20%.

Seems the less value you add the more money you take. The world is upsidedown.

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Just did a quick calculation after looking at my miserable saving return. Trying to look at banks in my-world terms of manufacturing.

I got just under 1% (before the additional higher rate tax to be taken) on my savings.

The bank takes my money and lends it out at 5-7%, so they are making a 600% markup (at 7%).

But then they lend the same money to about 30 clients, so its 18,000% markup. :angry:

I thought retailers where inefficient and greedy charging 100% markup. Manufacturers are lucky to get 15-20%.

Seems the less value you add the more money you take. The world is upsidedown.

Are you measuring the bank's margin at the same point on the yield curve?

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Are you measuring the bank's margin at the same point on the yield curve?

That is arguable, but the simple view is 'cost on raw materials' which don't include labour and overheads. The banks raw material is money, that they buy in at 1.2%year of the deposit....oops sorry I have been unfair and not included the tax they pay on our behalf (1% changes to 1.2%), still not that much effect they are in the 10K% range.

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That is arguable, but the simple view is 'cost on raw materials' which don't include labour and overheads. The banks raw material is money, that they buy in at 1.2%year of the deposit....oops sorry I have been unfair and not included the tax they pay on our behalf (1% changes to 1.2%), still not that much effect they are in the 10K% range.

If its cost on materials, then the same money is only lent once.

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That is arguable, but the simple view is 'cost on raw materials' which don't include labour and overheads. The banks raw material is money, that they buy in at 1.2%year of the deposit....oops sorry I have been unfair and not included the tax they pay on our behalf (1% changes to 1.2%), still not that much effect they are in the 10K% range.

Barclays' net interest margin was 223 bps in Q2/10 rather than the 600 to 700 bps range that you mentioned. I am not sure about other banks.

This might still include some yield curve effects where they lend long and borrow short but I assume that the tightening up of approaches to liquidity has reduced this impact.

As an aside, site like Zopa give one the ability to "be the bank" if one really feels the need to earn some of the margin that banks earn. it is possible to disintermediate them. The only remaining question is whether the risk is worth the reward.

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If its cost on materials, then the same money is only lent once.

Eh? Fraction reserve?? surely I deposit 20K cash they lend out 600K (at 30x)?

Ah ok, its a technicality. There isn't a proper comparison in manufacturing for being able to magically sell the same materials 30x. Software, maybe but huge investment costs, not a material transfer type of biz.

Edited by Ride_on

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Very roughly there are about 2,000,000,000,000 (two trillion) lent-into-existence, electronic bank credit pounds in circulation.

Assuming an average interest rate spread of 5% between depositors and borrowers, the net price paid by us money users to the commercial banking system for the provision of our means of exchange in this ridiculously expensive manner is about £100,000,000,000 (one hundred billion) per annum.

If instead we had our own publicly issued, debt-free, persistently circulating money supply and then lent it to each other in a free market, perhaps through genuinely competing intermediaries, then the net cost would decrease by an order of magnitude.

Banking would become a competitive service "industry" rather than the present all controlling monster.

http://www.positivemoney.org.uk/

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Eh? Fraction reserve?? surely I deposit 20K cash they lend out 600K (at 30x)?

We are an open system so some of the money leaks out to other economies.

Some money is lost due to defaults.

Liquidity concerns etc mean that the multiple is lower than 30x.

You can "become the bank" and earn the spreads by buying RMBS, credit card ABS, lending to consumers on Zopa, buying bank shares etc etc. Those have not turned out to be great strategies in the last few years (to put it mildly).

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Barclays' net interest margin was 223 bps in Q2/10 rather than the 600 to 700 bps range that you mentioned. I am not sure about other banks.

This might still include some yield curve effects where they lend long and borrow short but I assume that the tightening up of approaches to liquidity has reduced this impact.

As an aside, site like Zopa give one the ability to "be the bank" if one really feels the need to earn some of the margin that banks earn. it is possible to disintermediate them. The only remaining question is whether the risk is worth the reward.

Margin is not the same as markup. Is the ratio of what you buy it for to what you sell it for, not sure how the banks are calculating margin (after labour+overheads??)

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Very roughly there are about 2,000,000,000,000 (two trillion) lent-into-existence, electronic bank credit pounds in circulation.

Assuming an average interest rate spread of 5% between depositors and borrowers, the net price paid by us money users to the commercial banking system for the provision of our means of exchange in this ridiculously expensive manner is about £100,000,000,000 (one hundred billion) per annum.

If instead we had our own publicly issued, debt-free, persistently circulating money supply and then lent it to each other in a free market, perhaps through genuinely competing intermediaries, then the net cost would decrease by an order of magnitude.

Banking would become a competitive service "industry" rather than the present all controlling monster.

http://www.positivemoney.org.uk/

Halve the spread and add in credit losses and the net cost works out to about zero.

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Eh? Fraction reserve?? surely I deposit 20K cash they lend out 600K (at 30x)?

Ah ok, its a technicality. There isn't a proper comparison in manufacturing for being able to magically sell the same materials 30x. Software, maybe but huge investment costs, not a material transfer type of biz.

sure, in order to lend something, they have to have something...they dont lend credit...thats what you end up with after they have lent you money.

In order for them to be able to lend more, they need more money...the limits are set by law apparently, not that youd notice, otherwise the merry go ruond would produce infinite credit very quickly and a bust...hang on a mo!

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Margin is not the same as markup. Is the ratio of what you buy it for to what you sell it for, not sure how the banks are calculating margin (after labour+overheads??)

Margin is simply the weighted average return earned on assets - the weighted average cost of funds. This is a gross number before the costs of labour, overheads, credit losses etc.

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We are an open system so some of the money leaks out to other economies.

Some money is lost due to defaults.

Liquidity concerns etc mean that the multiple is lower than 30x.

You can "become the bank" and earn the spreads by buying RMBS, credit card ABS, lending to consumers on Zopa, buying bank shares etc etc. Those have not turned out to be great strategies in the last few years (to put it mildly).

Ok the multiple is lower now, but I read some banks where at 30x in 2007, still its a big multiplier.

Defaults I would say are like faulty returns so again irrelevent in 'markup'. Yes you can use an argument to say there is more risk to justify bigger markups, but 10,000% markup just seems mad to me. Seems they are operating very risky businesses.

In Zopa can you lend you money out multiple times?

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Margin is simply the weighted average return earned on assets - the weighted average cost of funds. This is a gross number before the costs of labour, overheads, credit losses etc.

Sounds like something completely different to what I am talking about. Surely the assets used to secure loans didn't cost them anything. It reduces their ability to lend and they have leant out against it so its not a cost of money they buy. I'll have to think about that, but the savings example is a simpler one to understand.

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Ok the multiple is lower now, but I read some banks where at 30x in 2007, still its a big multiplier.

Defaults I would say are like faulty returns so again irrelevent in 'markup'. Yes you can use an argument to say there is more risk to justify bigger markups, but 10,000% markup just seems mad to me. Seems they are operating very risky businesses.

In Zopa can you lend you money out multiple times?

The 223 bps net margin is a gross number. Risk adjusted it is certainly lower.

You can lend your money to a bank or directly to a borrower via Zopa, the same number of times : once.

My point is that you have the ability to lend your money to people besides banks. If you still choose to lend it to a bank, that isn't really the bank's fault : its yours.

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Ok the multiple is lower now, but I read some banks where at 30x in 2007, still its a big multiplier.

Defaults I would say are like faulty returns so again irrelevent in 'markup'. Yes you can use an argument to say there is more risk to justify bigger markups, but 10,000% markup just seems mad to me. Seems they are operating very risky businesses.

In Zopa can you lend you money out multiple times?

You're confusing capital with deposits.

Deposits are a liability.

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Halve the spread and add in credit losses and the net cost works out to about zero.

On the other hand, double the spread and get the taxpayer to pay the losses and the net cost is even more ... :(

The point is that there is a much cheaper, more stable, fairer way for us to provide ourselves with a viable means of exchange.

http://www.positivemoney.org.uk/

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sure, in order to lend something, they have to have something...they dont lend credit...thats what you end up with after they have lent you money.

In order for them to be able to lend more, they need more money...the limits are set by law apparently, not that youd notice, otherwise the merry go ruond would produce infinite credit very quickly and a bust...hang on a mo!

I talking about starting with savings, they buy money from me at 1% then sell it on at 7%, 30 times.

Deregulation of the fraction reserve has alot to answer for. I still think you get boom and bust, its a function of ANY credit/lending speculating on the future, the real danger is changing it once it has stabilised, noone can get used to it and pass down good rules to their kids.

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You're confusing capital with deposits.

Deposits are a liability.

I'm not doing the accounts, but I may disagree with that definition. As I have said money is like raw materials for banks, in that case it is a asset, something they can liquidise easily, maybe not..hmm I suppose the depositor may want their money back in which case the 30x they lend out based on it is 'run' territory.

This is my-world, I make the rules, get with the program ;-) money is raw material!

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On the other hand, double the spread and get the taxpayer to pay the losses and the net cost is even more ... :(

The point is that there is a much cheaper, more stable, fairer way for us to provide ourselves with a viable means of exchange.

http://www.positivemoney.org.uk/

If the only function of banks was to provide us with a means of exhange, you would be right.

The costs of banks are the result of the need for dealing with the temporal preferences of borrowers and lenders, the pooling of assets and laibilties, maintaining a payments system, measuring and taking credit risks, ensuring liquidity etc etc.

The whole "free money" movement is really just a free rider problem. The functions that banks provide cannot ever be not free. Their ability to create money subsidises the cost of some of their other activities : not all of it flows directly to employees or shareholders.

Of course, bankers have sorted out the free rider problem to their own benefit. They take all of the rewards and none of the risks. I can completely understand why the general public would also like to be free riders. The solution to the problem lies in ensuring that bankers are unable to be freeriders rathen creating even more freeriders.

I am a big fan of taking a "if you can't beat them, join them" approach. If you really think that they have special powers, you could just buy some shares and own a portion of those special powers yourself.

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If the only function of banks was to provide us with a means of exhange, you would be right.

The costs of banks are the result of the need for dealing with the temporal preferences of borrowers and lenders, the pooling of assets and laibilties, maintaining a payments system, measuring and taking credit risks, ensuring liquidity etc etc.

The whole "free money" movement is really just a free rider problem. The functions that banks provide cannot ever be not free. Their ability to create money subsidises the cost of some of their other activities : not all of it flows directly to employees or shareholders.

Of course, bankers have sorted out the free rider problem to their own benefit. They take all of the rewards and none of the risks. I can completely understand why the general public would also like to be free riders. The solution to the problem lies in ensuring that bankers are unable to be freeriders rathen creating even more freeriders.

I am a big fan of taking a "if you can't beat them, join them" approach. If you really think that they have special powers, you could just buy some shares and own a portion of those special powers yourself.

they certainly do have special powers...the power to scare the shite out of politicians who fear tanks on the streets if a bank is allowed to fail.

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If the only function of banks was to provide us with a means of exhange, you would be right.

The costs of banks are the result of the need for dealing with the temporal preferences of borrowers and lenders, the pooling of assets and laibilties, maintaining a payments system, measuring and taking credit risks, ensuring liquidity etc etc.

The whole "free money" movement is really just a free rider problem. The functions that banks provide cannot ever be not free. Their ability to create money subsidises the cost of some of their other activities : not all of it flows directly to employees or shareholders.

Of course, bankers have sorted out the free rider problem to their own benefit. They take all of the rewards and none of the risks. I can completely understand why the general public would also like to be free riders. The solution to the problem lies in ensuring that bankers are unable to be freeriders rathen creating even more freeriders.

I am a big fan of taking a "if you can't beat them, join them" approach. If you really think that they have special powers, you could just buy some shares and own a portion of those special powers yourself.

Except that these costs are apportioned in the most inefficient way possible being a 'tax' on our means of exchange. There is no competition in such a system meaning that costs are not correctly apportioned in size and per service provided. For example for 'free bank accounts' it matters not how efficent they are in providing this system, because there is no cost to it that the account holder pays.

If we did away with the hidden money surcharge and had to pay directly on account services provided we would automatically gravitate to the most cost efficient provider. Which is why the banksters hate the idea of this system of money, as increased competition & efficiency automatically means less income for them.

As for free riders free money cannot and does not create free riders, the only possible way it could would be if banks could operate at loss in perpetuity. Ofc they might not apportion costs as they occur, for example by creating loss leaders, but it would be a damn sight closer to where those costs really arise than the current system.

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