How Banks Work

If you’re worried about the ethical implications of writing off your debts or other loans, have a read of this article.

Most people have incorrect notions of how banks work. Most of us think that the banks are doing us a huge favour by lending us money. In fact, we are doing them a huge favour by allowing them to lend us money which they immediately start earning from when we start paying our monthly instalments plus interest.

You see, without us asking for credit, they could not create the money and then make money from it by way of being “paid back”, plus interest.

It’s called Fractional Reserve Banking and all banks use this to create their own (vast) wealth.

Fractional Reserve Banking is 100% legal:

Banks can lend 10 times as much money as they have on reserve.

Banks charge an interest rate on the money they lend.
If you put £1000 into a bank, that bank is then able to lend £10,000 and charge interest on top of it, which they immediately do.

Most people go into the bank manager’s office feeling a bit humbled by the whole occasion. Well, you needn’t worry. The bank is more than willing to lend you the money. All it needs is for you to ask for it and it can then create the money out of thin air. The money, up until the point you ask for it, does not actually exist. All that needs to exist is the 10% of the worth of the loan in the bank’s deposits.

But once it exists, it is the bank’s good fortune that you immediately have to start paying it back to the bank, with a bit of interest on top for good measure! And remember, the money that you’re paying to the bank every month is for a sum of money that didn’t exist until you walked in the bank manager’s office.

All banks do this, even the app-based challenger banks have started doing loans and overdrafts.

The return on investment from each loan is 90% + interest on average, though in some countries the ratio can be as high as 1 in 28. In the U.K. it is thought to be around 1 in 12 for the average bank.

“UK banks can create roughly 12 times the amount deposited”
Source: Times Online, August 3, 2008.

Now you know why every corporation wants to be a bank.

Now that you know how this works, don’t you want to be a bank as well? Of course you do!

Say that if someone deposits £1000, the bank can lend up 90% of this (assuming a 10% reserve) – whilst only keeping 10% in reserve – in case someone comes in to make a withdrawal.

So the bank could loan out £900, whilst keeping £100 on hand as a reserve.

Now you have an income of around £200 a month. In five month’s time you’re going to have all your money back, but you’re still going to be paid, with interest, for the following four and a half years after that!