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Working system of banking and ways they use to make money

May 20, 2016 4:49 pm by: Category: Finance Comments Off on Working system of banking and ways they use to make money A+ / A-

Banks basically earn money by giving money at higher rates than the cost of the money they get from the depositors. If we think more specifically, banks deposits interest on the loans which is usually higher and then they give interest to the depositors which is lower than the interest rate of loan. This difference is called as the “spread,” or net interest income, and the time when that net interest income is divided on the basis of bank’s earning assets, it is called as the net interest margin.

Deposits

This is the largest source of funds for the banks; This is the money that account holders deposit to the bank for safekeeping and saving, this also helps in earning some amounts of interest. Generally this is referred as “core deposits,” these are typically done through current and savings accounts that most of the people today have.

bank

In most of the cases, these deposits are short terms ones. But people typically maintains the account for many years with a particular bank, the customer holds all the rights to withdraw the complete amount at any point of time. Most of the banks today pay no interest on current account, or either they pay very little interest rates.

Wholesale Deposits

If a bank unable to bring a sufficient amount of core deposits, that bank can convert the whole sources of money. In many ways, these funds are similar to interbank CDs. Some banks do not follow the branch-based deposit model. You can go for san francisco bank in order get the best benefit.

Share Equity

As we know, deposits are the pimary and main source of collections of funds for every bank, and thus shareholder equity is becomes vital part of a bank’s capital.

Common equity is straight. This is the money that the bank has earned by selling the shares to the foreign investors. While larger banks often pay money on the common shares, which is not all required.

Banks usually issue good amount of shares to improve the capital. As this capital becomes expensive, and this is generally provided only at the of trouble, or to ease an achievement. Using this the bank get the right to buy the shares back at the time when the financial condition is stronger, and the bank does not require expensive capital.

So in this way the banks work and there are many other methods as well, that the banks usedin order to earn money.

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