Banking Explained – Money and Credit - Deepstash
Banking Explained – Money and Credit

Banking Explained – Money and Credit

Curated from: Kurzgesagt – In a Nutshell

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Traditional banks

Traditional banks

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.

Banks are, in essence, in the risk management business. People keep their money in banks and receive a small amount of interest. In turn, the bank takes this money and lends it at much higher interest rates. So banks take funds that savers don't use and turn them into funds society can use to do things like buying houses or growing businesses. 

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The problem with traditional banks

The main problem with banks nowadays is that many have abandoned their traditional role as providers of long-time financial products in favour of short-time gains that carry much higher risks.

For example, back in 2008, banks like Leeman Brothers gave credit to nearly anyone who wanted to buy a house, putting the bank in a risky position. It led to the collapse of the housing market in the US and parts of Europe, causing stock prices to plummet, eventually leading to a global banking crisis.

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Investment banks are gaining in popularity

Today, other models of providing finance are gaining ground fast. For example, new investment banks charge a yearly fee and do not get commissions on sales. This motivates them to act in the best interests of their clients or credit unions. They provide the same financial services as banks but focus on shared value instead of maximising their profits.

Their goal is to help members create opportunities, such as starting small businesses, expanding homes and investing back into communities. They are controlled by their members, who democratically elect the board of directors.

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Other finance models

Other finance models

  • Credit union systems range from a few members to organisations with hundreds of thousands of members. They focus on benefits for their members, which influences the risk that credit unions are willing to take. 
  • Crowdfunding platforms enable people to get loans from large groups of small investors, circumventing the bank as a middle man.
  • Micro lending. These platforms offer microloans to businesses and personal people who previously could not access the money they needed.

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