Basics of Banking

Let us dive in straight! Come along!

Banks - are financial institutions that enable circulation of money/ currency. They function on a golden rule that

Assets = Liabilities

Understanding Assets = Liabilities in a basic sense

Money in                                         =                        Money Out

1.) Deposits                                                                                     1.)   Lending                 

2.) Loan Interests                                                                            2.)   Institutional costs

3.) Bonds                                                                                         3.)   Investments

4.) Interbank borrowing                                                                  4.)  Interbank Lending

                                                                                                        5.)  Deposit / Bond interest payment

Please do not be puzzled seeing unknown jargons (if any). Everything is explained below :) If people find it too basic, please be patient for future posts. Or else, please continue :-) 

Interest rates

When market conditions are good the interest rates for both deposits and lending are super low sometimes tending to zero.

Understanding the interest rates:

When the economy/ market condititons are not so good, banks need money and we lend them ( Hurray! This was the first time I started to look at it in this perspective! ) in the form of deposits and they woo us at this time by giving attractive interest rates ( higher in this case). As the banks give us higher interest rates for deposits, they have to set their lending ( for eg.  mortgage) rates higher than the deposit interest rates.

When the market conditions are good, money influx in banks are high and hence the deposit / lending rates start tending towards zero.

Do you know that banks lend money to each other?

Banks raise money in the form of  deposits ( short term/ long term) , current accounts, savings accounts, bonds (explained later) etc., They lend money as mortgages at higher interest rates, endure institutional costs, make investments ( buy shares, commodities (explained later)) and lend money to other banks for a day or several days/months at a particular interest rate, if the other banks have deficit, or they are of a certain model. ( For eg., JP Morgan Chase a world renowned bank does have borrowing as their main source of raising funds!) . The borrowing of money in-between banks to raise funds is called as the Inter-bank borrowing and lending money between two banks is Inter-bank lending

Overnight money-market rate:

When a bank lends money to the other just for a day or over-night, the interest rate for that transaction is called as the overnight money-market rate. This rate plays a major role in the analysis of the economic conditions prevalent at that  particular time period.