by the Man in the Bowler Hat
Dishonest money dwindles away, but whoever gathers money little by little makes it grow.
Proverbs 13:11
So you want to be rich? Seems its a preoccupation by many. DISCLOSURE: having a bit more money in the “bank” than the average person in the overall population is a comfort, that allows for a few more options. For example, ever hear of the pejorative expression “fuck you money?” This simply means that there is a personal level of saving in the bank, that makes it possible to concentrate on non-monetary incentives or interests (like blogging) a lot more than on monetary ones. Sadly IMHO human nature being what it is, too many individuals do not seem to be able to differentiate a “want” from a “need” and therefore do not find an inner peace or realize that money can’t buy happiness. So this manifests itself in various self destructive behaviors like always trying to get more money any way possible (i.e. “greed” which is one of the so called deadly sins).
Back to the topic at hand, answering the question what is a bank and why is it important.
Basically the way I look at things, a “bank” is a place where an individual stores things of value to be used later on in times of need. Bet you were surprised I did not include anything specifically about money or mention the economy, which is the conventional way of looking at things. This is because as a kid I was taught that education is something of value and that once you have it, its something (like a moral compass) which can’t be stolen or taken away once its obtained. Basically, building upon the foundation of knowledge it's possible put away something that has the potential to grow into “fuck you money” in a brick-and-mortar bank.
As for actual mechanics of a traditional bank, basically its function is to be an institution to maintain deposits, make loans, and directly control the checkable deposits portion of the economy’s money supply. In other words banks act as the middle man or glue that binds together all the players in the economic system. In theory banks or other financial institutions like credit unions are suppose to serve the financial needs of the community. Mainly by providing loans, banks and other financial institutions maintain and build up the economy.
With respect to loans, the SOP of a bank should be to use the “Five C’s” (capacity, character, capital, collateral and conditions) check list to verify creditworthiness, by an in depth study of:
“Capacity” - the debt-to-income ratio, in other words how much does a person or business owe compared to how much they earn (the lower the ratio, the more confident a bank will be in the capacity to repay the money)
“Character” - here a banker will look at the track record of a person or business and ask questions like is there a good record of paying your bills on time and in full (which is an indication of fiscal responsibility and trustworthiness)
“Capital” - the bottom line “value” of your assets minus your liabilities
“Collateral” - an asset (for example, a home) that a lender has a right to take ownership of and use to pay off the debt, if the loan payments cannot be made as agreed
“Conditions” - the overall environment (economic and other wise), in other words do conditions look favorable or unfavorable
Sadly the fly in the ointment of the theory in the “traditional banking” system is the human factor which can cause corruption and mismanagement. Basically this is because a bank is an institution which processes “money” and is run by people with different skill sets and a collective moral compass that perhaps is broken or non existent. Bottom line, an institution is only as strong as the people setting the tone of management and the front line persons following the lead.
Last thought for now,… The conventional view of a traditional bank is, it starts off with investors who exchange their money for shares in the institution. The theory is the money raised by selling shares in a startup brick-and-mortar bank, is akin to the idea that a small seed mustard that is planted, grows to dominate the land scape. The hard reality is a pure profit motive takes over and smaller banks merge with other smaller banks or are out right bought by bigger banks in a process called, M&A which is short hand for mergers and acquisitions. The capitalist bottom line thinking goes if a little is good, then lots is very, very, very GOOD! Or looked at another way, depending upon the dose, its poison.
Next time, what is the triple bottom line?
