How the Financial System Works

This lecture will explore our financial system. Why do banks exist, and what do they do with the money that savers lend to them?

We’ll explore what risks they face and how they can go bust – even if they make completely safe investments. How does the stock market work – what happens when you trade shares, and why do some companies raise money on the stock market and others don’t? Can ordinary citizens influence how the money they save is used?

A lecture by Alex Edmans

The transcript and downloadable versions of the lecture are available from the Gresham College website:

[fifimetaphor]

Brilliant lecture. Very clear explanation of banking and the stock market. Gresham College keeps giving.

[Ofmadinah]

Professor Edmans is a living legend of our time.

[nbme-answers]

Thanks Gresham College! I had not heard of Gresham until coming across some of its excellent lectures posted to youtube. We welcome you to the Internet!

[kiyashrahman]

This is masterpiece! He is making complex ideas like cheesecakes.

[danwylie-sears]

The money to cover defaults doesn't come from fractional reserve. It comes from the spread between the rate the bank loans at and the rate it pays its depositors (or from fees paid by borrowers). It's a risk premium. If the bank thinks that (for example) there's a one-in-ten chance that you won't pay back your loan, it charges enough that out of nine borrowers who pay in full and one who defaults, the nine pay enough to cover the loss on the one. If that were all that's going on, the bank would be able to issue mortgages in the amount of 100% of its deposits.

Reserves are there for what you discuss next: liquidity. They're there to cover the fact that depositors are free to withdraw their deposits at any time whereas borrowers only have to pay back their loans on schedule, so if banks lent out the whole amount they would occasionally be unable to cover withdrawals.

[gb-jgud]

I am against socialism and communism but what is needed is capitalism combined with a socialized banking/money system to stabilize it. The financial industry should be curbed for only 5% profit and there as a service only. We don't need anymore "creative instruments". The basis of what works is well known. Wall Street combined with banks and lending with no profit limit to these private institutions is a toxic and lethal combination that results in over investment, and global crashes (great depression). Worse, coupling retirement and pension retirement funds into wallstreet is insane. Behind every crises seems to be a Harvard business graduate. The monetary system needs to be stable as the air we breath. If this were done over half the problems in the world would disappear.

[gradientO]

Are those slides available to download?

[Eric-yeyz]

The bank does not need to have customers money to lend it as mortgages because it is just a number that appears in a ledger. No one needs to see that money, so it does not exist. When the mortgage is paid off it just disapears.

[AgnesHarperqx]

It's simple to buy a stock, but extremely challenging to choose the appropriate one without a tried-and-true plan. Since I don't know the best entry and exit tactics, growing my $160, 000 portfolio has been a huge difficulty for me. Any recommendations would be highly appreciated.

[samferrer]

And at the end of the lecture he compared bank with cryptocurrency(just another urrency) instead of fiat currency with cryptocurrency. The former makes no sense and the latter compares two things with no backing or whatsoever

[Stevenharknett]

Gold and Silver are money the rest is just credit. This guy is quoting from out of dater text books.

[zareenwilhelm]

50:53 Sorry, hard disagree. Ask engineers where the value is.

[samferrer]

Ok, after all the explanation, how can we see that banks have positive impact? Banks are not necessary at all in a connected civilisation...

[funkyradbomtrack]

Sorry Gresham but this is the equivalent of an earth centred astronomy lecture. way out of date, not according to me, but according to the Bank of England and others.
Banks do not intermediate between savers and lenders, they are originators of money. As the BoE puts it "deposits do not create loans, loans create deposits"
Banks cannot lend from reserves (unless they lend cash which they don't) and the money multiplier and fractional reserve idea only exists in text books, not in the real world.
Just search "money creation in the modern economy" and have the Bank of England explain more, no need to take my word for this.

[TeddyAlexanderv]

It's simple to buy a stock, but extremely challenging to choose the appropriate one without a tried-and-true plan. Since I don't know the best entry and exit tactics, growing my $160, 000 portfolio has been a huge difficulty for me. Any recommendations would be highly appreciated.