Bank deposit question

Discussion in 'Economics' started by kandlekid, Oct 25, 2011.

  1. Assume I deposit into a savings account, I'll make maybe .5 % interest. When the bank loans out my deposit, they'll make maybe 3 - 10 % (maybe more), depending on the type of the loan. Should I not make the same rate as the bank ? Of course not, but why not ?

    Maybe the opposite of usury (giving incredibly low interest on deposits) ?
  2. Polix


    Because when you learn,you know what makes the World turn.
  3. DIce


    To make 3-10% returns, the bank assumes risk. In the savings account, you do not assume any risk (or it's a low enough risk as to be effectively no risk short of total economic collapse).

    Additionally, the bank has to make some money in exchange for providing you with a service. If it didn't make any money, it couldn't operate.

    If you are willing to accept risk, like the bank does, you can certainly invest in instruments that have the potential to give you those 3-10% returns.
  4. lynx


    The bank does not loan out your deposit. They invest it in the safest investments they can find, typically t-bills or other US government guaranteed bonds. The bank takes a cut of the return, of course. That is why you get paid so little on your money.

    The money that the bank loans out comes directly from the Federal Reserve through a credit facility called the "discount window". Lending money is a risky activity, so they mark up the interest rate on the money that they borrowed from the fed so that they can both make a profit and cover losses from defaults.

    I will leave it to others to editorialize about the abuses of this system.
  5. Erm, no, this is very wrong...
  6. The bank takes risk when it loans the money out at a higher interest rate (duration risk, credit risk, etc). You, on the other hand, don't take a lot of risk, since your deposit is FDIC guaranteed and there's no notice period. So why should you be receiving the same rate as the bank?
  7. ASE1245


    If you want to take the time, effort and risk to loan your money, you can make a higher return. It's very difficult to spread risk on a small scale. As an example, you can make small loans on used cars in your community. It's a lot of work and hassle to make 6% interest.
  8. If you're interested in loaning to consumers, check out Prosper or Lendingclub.

    And in regards to the banks, lets not forget to touch on fractional reserve banking.
  9. lynx


    How is it wrong?
  10. Directly lending to a consumer via Prosper is like buying the equity tranche of an ABS CDO with exactly one loan in the pool... with your coupon capped by some silly state usury law that's divorced from the actual riskiness of the debtor....

    I can never figure out why anyone would want to lend on Prosper - other than not understanding credit spread.

    #10     Oct 25, 2011