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ETON Entrance exam: 100% WRONG On How Banks Operate - No Wonder The Banks Get Away With It !!!!
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08/08/2013 08:31 AM
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As many of you know, money is created as debt (a promise to pay), it is not created by lending savers money...
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Question 4 : START A NEW SHEET OF PAPER NOW
Read this passage and look at the chart which goes with it and then answer the questions that follow.
Banks are commercial businesses that attract savings from people and these provide funds from which loans can be made. A bank lends to those who need to borrow and it makes a profit by charging a higher interest rate on loans than the rate it offers to savers. Every time a saver puts money into an account, the bank must decide how much to hold as a cash reserve so that there is enough money to meet daily cash withdrawals. The remainder can be lent out in the form of a loan which is credited to the bank account of a borrower and can then be spent. It is up to the bank to decide how much interest to charge on a loan and the length of time that a borrower is allowed before repaying the money.
On any given day, only a tiny proportion of savers will go to a bank to ask for their money back. This allows a bank to keep a very low percentage of new savings in cash and to lend out the remainder. Consider this example: if I put £5,000 of my savings into my bank account, it is possible that the bank will keep only £50 of this as a cash reserve and lend out the rest. Once spent, this money is likely to find its way back into other banks in the form of fresh savings. In this way our banking system seems to have an almost unlimited ability to lend and create new money and make high profits. Barclay’s Bank made profits of £6 billion in 2010 and HSBC, Europe's biggest bank, made profits of £12 billion.
Not every loan request is accepted and recently banks have been much criticised in the media for cutting the amount of loans they offer to small businesses and for preventing the British economy recovering from the recession. Savers, too, appear to have suffered recently; the interest they have received from banks has not kept pace with increases in the cost of living and millions of savers have seen a fall in their standard of living.
Last Edited by The Scientist on 08/08/2013 08:37 AM