yego.me
💡 Stop wasting time. Read Youtube instead of watch. Download Chrome Extension

Banking Explained – Money and Credit


4m read
·Oct 27, 2024

The international banking system is an enigma. There are more than 30,000 different banks worldwide, and they hold unbelievable amounts of assets. The top 10 banks alone account for roughly 25 trillion US dollars. Today, banking can seem very complex, but originally, the idea was to make life simpler.

11th century Italy was the centre of European trading. Merchants from all over the continent met to trade their goods, but there was one problem: too many currencies in circulation. In Pisa, merchants had to deal with seven different types of coins and had to exchange their money constantly. This exchange business, which commonly took place outdoors on benches, is where we get the word "bank" from; from the word "banco," Italian for "bench."

The dangers of travelling, counterfeit money, and the difficulty of getting a loan got people thinking. It was time for a new business model: home brokers started to give credit to businessmen, while Genevese merchants developed cashless payments. Networks of banks spread all over Europe, handing out credit even to the church or European kings.

What about today? In a nutshell, banks are in the risk management business. This is a simplified version of the way it works. People keep their money in banks and receive a small amount of interest. The bank takes this money and lends it out at much higher interest rates. It's a calculated risk because some of the lenders will default on their credit. This process is essential for our economic system because it provides resources for people to buy things like houses or for industries to expand their businesses and grow.

So, banks take funds that are unused by savers and turn them into funds society can use to do stuff. Other sources of income for banks include accepting saving deposits, the credit card business, buying and selling currencies, custodian business, and cash management services.

The main problem with banks nowadays is that a lot of them have abandoned their traditional role as providers of long-term financial products in favour of short-term gains that carry much higher risks. During the financial boom, most major banks adopted financial constructs that were barely comprehensible and did their own trading in habit to make fast money and earn their executives and traders millions in bonuses. This was nothing short of gambling and damaged whole economies and societies.

Like back in 2008, when banks like Lehman Brothers gave credit to basically anyone who wanted to buy a house, and thereby put the bank in an extremely dangerous risk position. This led to the collapse of the housing market in the US and parts of Europe, causing stock prices to plummet, which eventually led to a global banking crisis, and one of the largest financial crises in history. Hundreds of billions of dollars just evaporated. Millions of people lost their jobs and lots of money. Most of the world's major banks had to pay billions in fines and bankers became some of the least trusted professionals.

The US government and the European Union had to put together huge bailout packages to purchase bad assets and stop the banks from going bankrupt. New regulations were put into force to govern the banking business; compulsory bank emergency funds were enforced to absorb shocks in the event of another financial crisis. But other pieces of tough new legislation were successfully blocked by the banking lobby.

Today, other models of providing financing are gaining ground fast. Like new investment banks that charge a yearly fee and do not get commissions on sales, thus providing the motivation to act in the best interests of their clients. Or credit unions - cooperative initiatives that were established in the 19th century to circumvent credit sharks. In a nutshell, they provide the same financial services as banks but focus on shared value rather than profit maximization. The self-proclaimed goal is to help members create opportunities like starting small businesses, expanding farms, or building family homes while investing back into communities.

They are controlled by their members, who also elect the board of directors democratically. Worldwide, credit union systems vary significantly, ranging from a handful of members to organizations with several billion US dollars and hundreds of thousands of members. The focus on benefits for their members impacts the risk credit unions are willing to take, which explains why credit unions, although also hurting, survived the last financial crisis way better than traditional banks.

Not to forget the explosion of crowdfunding in recent years. Aside from making awesome video games possible, platforms arose that enabled people to get loans from large groups of small investors, circumventing the bank as a middleman. But it also works for industry - lots of new technology companies started out on Kickstarter or Indiegogo. The funding individual gets the satisfaction of being part of a bigger thing and can invest in ideas they believe in, while spreading the risk so widely that, if the project fails, the damage is limited.

And last but not least, microcredits. Lots of very small loans, mostly handed out in developing countries that help people escape poverty. People who were previously unable to get access to the money they needed to start a business because they weren't deemed worth the time. Nowadays, the granting of micro-credits has evolved into a multi-billion dollar business. So, banking might not be up your street, but the banks' role of providing funds to people and businesses is crucial for our society and has to be done. Who will do it and how it will be done in the future is up for us to decide, though.

More Articles

View All
Probability with combinations example: choosing groups | Probability & combinatorics
We’re told that Kyra works on a team of 13 total people. Her manager is randomly selecting three members from her team to represent the company at a conference. What is the probability that Kyra is chosen for the conference? Pause this video and see if yo…
PSA: Why it’s a BAD IDEA to pay down your mortgage early!
It’s because of these reasons that’s exactly why I will never pay down my mortgage early. If I have a 30-year loan, I will be making the bare minimum payments and just investing the difference versus ever putting an extra dime towards paying down that loa…
Stringless Yo-Yo!
Can you just like … Yo-Yo like a basic Yo-Yo? Yeah, like this. But this is not a basic Yo-Yo. No! That is awesome! Nicely done! This is Ben Conde, he’s got a brand new channel on YouTube which is about Yo-Yoing like a crazy person. But, I’m going t…
Environmental change and adaptation in Galápagos finches | Middle school biology | Khan Academy
This here is a picture of the ground finch of the Galapagos Islands, and one of its primary sources of food is seeds that it finds on the ground. If we go back to 1976, we can look at the distribution of beak depths, and these beak depths I would assume a…
How I Bought My NEW Las Vegas Home For $0
What’s up you guys, it’s Graham here! So, as some of you know, I recently bought a home in Las Vegas, and I’m gonna be moving from California full-time by the end of the year. However, even though there have been a multitude of various reasons behind thi…
The Second Amendment | The National Constitution Center | US government and civics | Khan Academy
[Kim] Hi, this is Kim, from Khan Academy, and today I’m learning about the Second Amendment to the U.S. Constitution, which states that, “A well regulated militia being necessary to the security of a free state, the right of the people to keep and bear ar…