Why do banks give loans?

[mtgordon]

I believe that the market will go up around 10% per year on average. How does it make sense for banks to loan out money at a rate less than the average of the market? It seems like they should be able to make more than that.

My only guess is that they are allowed to lend money out to people but not allowed to put it in the market due to being FDIC insured or because the money isn't theirs or something.

Is there a market for a bank where they would give you a higher rate on your savings account (let's say 8%) but they were allowed to invest in the stock market if they see fit?

[The once and future king]

Because it dosnt have the money (well most of it) that it loans out in the first place. It literally prints it and then lends it. As you can imagine this can be very profitable.

This is how our monetary system works. Banks create the money supply as loans. If there wasn't any debt there wouldn't be any money.

Watch this simple video for explanation.

Money as debt.

[ifckladyluck]

which situation makes you more money?
+10%, +10%, +10%, -20%
+5%, +5%, +5%, +5%

[mtgordon]

+10%, +10%, +10%, -20% does not average out to 10%

[DesertCat]

Loans have specific repayment schedules and are collateralized, i.e. if payments stop the bank can start foreclosure proceedings to get their money back. This means a portfolio of loans, if underwritten conservatively, should have very low risk and very consistent interest payments (i.e. even if 4% of the loans aren't repaying you are still earning 96% of expected). Typically the bank is lending out at 7-9% while paying 5% or less, the difference pays their overhead costs (salaries, rent) and provides their profit margin.

To pay interest on an account you need a consistent stream of cash flow, i.e. the bank can't skip payments on your account one month because the stock market is down. Making the same level of payments while a portfolio of stocks is way down could devastate the portfolio. Stocks have much more volatility risk.

[The once and future king]

[ QUOTE ]
+10%, +10%, +10%, -20% does not average out to 10%

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Seriously, when a bank loans money it is not lending savings it has on its books, it is literally conjured out of thin air.
How can you not know this? This is how Fiat money works.

Edit to add, though the amount of money the bank can create is related to the currency it holds on its books.

[ifckladyluck]

[ QUOTE ]
+10%, +10%, +10%, -20% does not average out to 10%

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thank you, i can add.

if youre capable of higher level thinking, then you will understand the point of what i am saying. if not, then i can give you some more time series to average out for me.

[mtgordon]

I've just never looked into it. Never really had a reason to. I wasn't going against what you were saying, I was just commenting back to ifckladyluck that I was talking about averaging to 10% not typically being at 10% but averaging lower.

[ifckladyluck]

point is that because of compounding, huge drawdowns carry enormous risk. 5% for 4 yeras is better than losing 30 the first year and making 20 the next 3 (and that even averages out to 10)

second, whats the profit percentage if you take someone elses money at 5% and then lend it out at 7%?

[gonebroke2]

[ QUOTE ]
[ QUOTE ]
+10%, +10%, +10%, -20% does not average out to 10%

[/ QUOTE ]

Seriously, when a bank loans money it is not lending savings it has on its books, it is literally conjured out of thin air.
How can you not know this? This is how Fiat money works.

Edit to add, though the amount of money the bank can create is related to the currency it holds on its books.

[/ QUOTE ]

Exactly. Fractional reserve banking. They are loaning out 10 times or more of what they have in reserves. Why would they want to risk their $$$ in the volatile markets when they got a sure thing?