Comment by nostrademons | Hacker News Reader

Comment by nostrademons | Hacker News Reader

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I thought it was pretty well-known that you're the product of a bank, not the customer. I don't pay any fees to my bank (my balance is high enough that they waive them all), and they actually pay me some miniscule interest rate. But in return they get to use my savings to make loans on high-priced mortgages and credit cards, which earns them literally thousands in interest charges.

Retail banking locations are a market-share grab. They want to make it as convenient as possible to put your savings in a bank, because then they have access to your deposits, which can be loaned out as a lucrative product.

It's much like the Chrome Omnibox or Google Toolbar for Google, or the Facebook mobile app. These derive no revenue, but they make it as convenient as possible to use the company's products. That user attention can then be sold to advertisers for a nice profit.

Ditto Hacker News as well - your comments here don't benefit YCombinator at all, and they have to spend money maintaining & moderating it. However, insightful comments on HN attract intellectual people interested in startups, which are YCombinator's prime customer demographic, and so your contributions here are effectively very cheap advertising for YCombinator.

I've honestly never understood the point of even dealing with large banks. My credit union doesn't charge any fees, regardless of how much I have in my account. Free overdraft protection, extremely low interest car loans and used car loans, etc.

Oh, and they didn't become insolvent handing out crappy mortgages.

I prefer credit unions too and take loans through them when possible.

But my primary checking and money management accounts (business and personal) are with a major national bank. For cash flow, access, and generally moving money around it's hard to beat the convenience.

I wonder if it makes sense for for profit banks to have interest bearing savings accounts at all these days.

My bank was profitable through the entire mortgage crisis. It's a savings and loan though.

I'm like you, but realise that you are paying a fee by keeping your balance high enough in a low interest account to avoid other fees.

I like to have cash at the ready but that doesn't matter to the bank. They get 1 or 2k for nothing.

Well the banking model is to take demand deposits to issue longer term loans. Is that bad? People want loans, people want to deposit cash... Why should banks not operate this way?

Would it be better not to have deposits and loans?

I didn't say anything about good or bad in my post - I'm just commenting about what is.

I suspect that you (and probably other readers) are injecting some of the sentiment around the "You're the product, not the customer" meme that surrounds advertising-supported tech companies. I don't think those are bad things either, but a number of other HN readers do. I'm just pointing out that this business model has existed for centuries.

I'd like to think I'm a supplier to my bank.

I think "supplier" would've been a more accurate term when bank accounts actually paid interest. Savings accounts at my bank pay 0.01%; standard CD rates top out at 0.05% for a 1-year.

(I do have a high-yield online-only savings account that pays significantly more than that, and feel like I'm much more of a supplier to them, although in some way "supplier" connotes that I'm actively doing work to provide a product or service for them, which I don't feel toward my bank. But the article is about retail banks; the bargain with most retail banks these days is "They give you convenience; you give them money, which they can loan out to make more money." That's much more like the bargain that Internet companies and TV make than the one that say AdSense, App Developers, and Uber make.)

I think there used to be a balanced trade - like exists in many small banks and credit unions now. For holding your money with FDIC insurance and whatnot, the banks got fractional reserve and the right to lend your money at a particular interest rate - which they then shared a small piece of.

Now, banks are predatory. They charge you fees for everything (including having a deposit account!!), barely if at all share revenues derived from your money, and routinely flirt with disastrous insolvency, propped up only by the largest government on Earth.

That's why people feel like they've gone from customer to Matrix-style energy plant.

I think it probably started when the banks became less profitable, right?

Wait... Did that happen? Or was it their need to be always more profitable than before?

I think the interest rate wars are part of what caused the savings and loans crisis for example.

Is this really true though? I though that large banke don't really make money on private account but primarily on investing in the market an lending money to really big companies. Seriously interested.

Exactly. That's why rich people aren't "hoarding cash". They deposit it in a bank, which loans it out to people who spend it. It is not dead money.

The real reason they want depositors is fractional reserve banking. If you deposit $1, they can go borrow $10 from the federal reserve, loan it out, and be making interest on $10 of created, loaned money.

The bank of england called with some bad news:

http://bankunderground.co.uk/2015/06/30/banks-are-not-interm...

That's not how the fiat system works out (there's no borrowing from the federal reserve). You deposit $10, they loan out $9, which ultimately ends up back in a bank account to be further loaned out.

That's not what fractional reserve banking is at all.

The mechanics are incorrect but he has the general idea of the benefit banks accrue from each additional deposited dollar.

Highly recommend reading Steve Keen's "The Roving Cavaliers of Credit" for a dose of reality on the whole process.

tl;dr "banks extend credit, creating deposits in the process, and look for reserves later"

http://www.debtdeflation.com/blogs/2009/01/31/therovingcaval...

You will find no dispute from me as to whether banks actually do restrict themselves to limiting their credit creation to a ratio of their deposits. But that is how it is supposed to work.

According to the Fed's website, commercial banks (including foreign/international banks) can actually create and loan out up to $14,500,000 per loan and not be required to have anything backing it (0% required reserve ratio).

http://www.federalreserve.gov/monetarypolicy/reservereq.htm

Totally wrong. That document is not about loans. It doesn't even mention the word 'loan', except in the context of 'savings and loan associations'.

The document is about reserve requirements for deposits. Roughly speaking, if a bank takes in $100MM of deposits, it has to keep 10% of that ($10MM) in a way that's easy to access (either as cash in a vault, or as a deposit at the central bank). That way, if a depositor wants their money back, the bank will probably be able to give it to them.

If a bank has total deposits of less than $14.5MM, then the reserve ratio is 0%, instead of 3% or 10%.

Loans are created as deposits/accounts receivables which are included in net transaction accounts. Back that loan with a Credit Default Swap and you cant skirt any reserve requirements which was exactly what ripped the world economy in 2008.

This doesn't make any sense. When a bank creates a loan of $X and disburses the loan into the borrowers account, two things happen:

1) The bank's loan assets go up by $X 2) The bank's deposits go up by $X

Deposits are part of 'net transaction accounts'[0] so the bank would now need to hold 10% of $X in additional cash (e.g. in their vault).

So, it seems like the bank can create a loan of $X with just $0.1X of cash. Hang on, though. This assumes that the borrower just keeps the money in his bank account, which is unlikely. When she withdraws the money to spend it, the bank's reserve requirements go down by $0.1X (good) but they also need to pay out $X of cash (bad). So, it really did cost them $X to make $X of loan.

Now, if they have a CDS related to this loan, then they are insulated from the risk of default. But, how is that relevant to reserve requirements?

[0] "Net transaction accounts are total transaction accounts less amounts due from other depository institutions and less cash items in the process of collection."

I'm confused myself but thanks for debating. I was wrong about the 0% reserve ratio applying per account rather it is the sum total of all accounts held by the bank.

This info seems hard to believe and makes me think we're missing context

What? No.

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