Banking is Broken (And We May Not Be Able to Fix It) - How Money Works

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Banking has become too complicated and too concentrated for it's own good and this could have serious impacts on us all.

#Banking #Finance #HowMoneyWorks
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Music by Epidemic Sound

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Banking is an incredibly important industry which is based off a very simple concept.

People with more money than they know what to do with can keep it in a safe secure institution which can then lend that money out to people who have big idea’s but not enough money to make them happen.

They give a small incentive to the depositors, and charge a higher premium from the borrowers, making a profit for the service that they provide as a “financial intermediary”

This system has become more complex over time with things like fractional reserve banking, and alternative capital sources, but if we strip all of that away we will still find that the heart of banking is this simple mechanism.

For all of the hate that banks get, they can do a lot of good in an economy. To people who want a safe place to keep their money they offer an almost 100% guarantee that the money left with them will still be there, a day, a month, a century from when it was deposited.

They also make that money readily accessible, online, over the phone, from a collection of ATM’s, or simply through a plastic debit card.

To people that want to borrow money they are also the “go to” institution for a fair loan based on lending parameters developed over time.

We may hate things like credit scores and employment checks, but it’s part of the reason why so many people are paying below 3% on their mortgages right now.

[Aaron-wqjz]

One thing I’ll say about having a relationship with your manger for a loan is that as much as people hate to admit it, it allowed “personal biases” to influence their decision to hand out a loan

[arthurfibich]

Just a sidenote: Germany has a system of so called Sparkassen: Banks owned by cities or counties with the sole purpose to serve their local businesses and provide basic banking and payment services for every citizen living in their region. Normally, they are much more stable, have a lesser risk to default and keep a connection to local business

[bevbevan]

This is generally correct, but it's important to realize that there are 5, 000 banks in the US (more than the rest of the world combined). The 50 biggest banks act as you describe, the smaller 4, 950 do not and will make decisions based on actually talking to customers.

To simplify, if you've got a 9-5 job and a steady paycheck, the technology offerings of the megabanks (Citi, Chase, Wells Fargo and BankAmerica) will solve your issues; their employees aren't authorized to help much. If you've got anything unusual in your financial life (unusual income, foreign wires, small business, etc.), go with a community bank.

[errolmichaelphillips]

This explains a lot. And it's not only an American problem. I live in a small country and I've observed the same trend re: lending to small businesses etc.

[LordKnightcon]

7:53 "These loans used to be called sub-prime loans but for some reason that terminology has fallen out of style."
Yeah I can't possibly imagine why...
*glares in 2008*

[personzorz]

Banks do not lend deposits. They create a deposit in the name of the person who receives a loan which is the borrowers asset, paired with a liability to pay it back. Similarly that account is the bank's liability and the obligation to pay it back as their asset. All of this is created ex nihilo. And it all adds up to zero. At least at first.

The assets held by banks are not there to be lent out, they are to cover the instances where one of their assets goes bad via loan default but they maintain liabilities in the form of money in people's accounts.

[daszieher]

This is the only video, where I did not learn anything, simply because my business partners and I have gone through this in person.

That being said, it is accurate to the last word. Thank you for the content!

We ended up bolstering the company's credit rating with our own private money, something generally unadvisable, since you should spread your risks in your wealth portfolio as much as anyone else. Putting almost all your eggs in one basket has never been smart.

[jeffmofo]

Yup, so much easier getting a loan as a full time employee, I've been building a biz on the side for the past 4 years. Tried getting loans here and there. Realized banks don't give loans for startups, so started looking at investors, they don't want to give out much. So I been using my house as a loan source as well as credit cards. Just a couple of weeks ago, I talked with a startup investor and he didn't want to invest because I'm already making way to much for what he looks for. The bank on the other hand still wont lend to me, so I leveraged my house again.
It's ridiculous.

[PhillKaggitz]

When my dad bought his first house back in the 70’s, he literally used my grandpa’s word that he was going to pay as collateral. Apparently that was more than enough for the bank manager

[edi]

I've heard of an example that was equally funny and sad: an actress had her first major role and the movie was such a success that she became a millionaire. At that point, she wanted to rectify something she wanted to do years ago: get the citizenship rather than having to extend her permit all the time. Thus, she went to the office and there she was asked if she had a regular income, which she had to deny. She was then told that she'd need a regular income and if she's a part-time cleaning maid, that would be good enough...

[michaeldittmer]

Historically banks have not been safe. Throughout US history financial crises and bank failures have been common. Banks are not necessarily a safe place to put money. FDIC insurance helps but it doesn’t absolve banks of their shoddy risk practices

[crestinglight]

Never, ever work with a big bank. Work with your local credit union. They actually depend on local customer satisfaction to survive, unlike a bank who couldn't care less how happy you are with their "services".

[aroldoderienzo]

Thanks for the video, I remember when I had a small business...

Bank gave one of my employees a mortgage, declined me because: reasons. Go figure how his salary was more secure, even if I was the one paying it... Smh...

[richteffekt]

Can confirm from personal experience; especially when you start with an incorporated, limited liability company. The bank would not even look at my application unless I asked a number north of 100k, not even when I backed the amount I applied for with equal security.

[mjgamer]

I normally really like your videos but this one has some problems. For one, you admit that it is more difficult to verify supplementary income. The reason that the banks that will accept this income charge higher rates is because it takes longer and requires critical thinking which together mean that it costs more money to originate those loans. Now, does someone deserve an 18% car interest rate just because they have an annuity? No. But if the increase in APR is 3%, I don't think that's something to say is the end of the world. This is also something that isn't broken and isn't fixable. If it costs more to manufacture a product (in this case a loan), it is generally going to be sold at a higher price than a comparable product that cost less to manufacture.

The next problem is that you put focus on small business lending as opposed to big business lending, stating that banks are fine lending to bigger businesses. However, lending to big businesses vs small businesses can't be compared the way you are trying to. First, smaller businesses just don't have the ability to sell bonds on the open market. Historically, banks used to hold lots of corporate bonds and provided liquidity in the corporate bond market by allowing essentially any investor to sell bonds to the banks the same day. Now, banks hold almost nothing compared to what they used to, and instead serve as a finder service, linking corporate bond buyers and sellers. So outside of the arms of banks that are holding corporate bonds for investor portfolios, banks simply hold a lot less business debt in general, it's not just that they aren't allowing small businesses to lend to them.

Finally, non-prime and subprime are not the same thing at all. The ranges will depend heavily on the specific source and type of loan in question, but generally 680+ is prime, below 600 is sub-prime, and everything in-between is non-prime. Non-prime isn't bad, it just isn't great. It often means the person has generally decent financial responsibility, they just aren't always on time with their payments. Non-prime consumers will have significantly better rates, sometimes single digit interest rates, as opposed to the 15%+ that a sub-prime might see for the same loan if we are talking about auto loans. Additionally, many sub-prime customers can't even finance a car at all unless at a buy-here-pay-here dealership, yet non-prime customers can almost always get normal financing just at higher rates. Comparing someone who wants to claim supplementary income to a sub-prime consumer by saying they are currently called non-prime which is a new euphemism is just flat out wrong. This isn't a case where you simplified something to avoid going into unnecessary detail and dragging the video out. This is just incorrect and misleading. If someone watches this video and then hears someone refer to non-prime and thinks sub-prime in their head with all the connotations that term has, they will not have the right idea at all.

[mageyeah]

Overtime is in that supplemental category. Half my pay is overtime, and my base schedule includes a ton of “overtime” before I work any extra days. The upshot being I barely qualified for a mortgage with a monthly payment that is slightly less than the gross pay that I’m getting for a single day of overtime. But I’ve also been approved to pay rent equal to four times my mortgage payment.

[boringmanager]

I worked as a data scientist in a russian bank for a while, we used your job field as a category for a model. This way the information that waiters are better clients due to tips is incorporated in the model. I mean, it's a basic easy to implement trick. Either the video is incorrect or US banks don't use even basic application fields, which is 146% incompetence

[jajeronymo]

On the same line as the comment about Sparkassen, in Brazil we have cooperative banks that offer lower rates and more personal service to small business.

[stuartpaul]

the introduction is how it used to work. Fractional banking, QE and fiat money changed all that.

[jamp]

The worlds economy is broken not just banking. the world is fueled by debt and money printing these are scary times when we living in an unpressidented era of QE and global debt. .