As a finance and accounting major, I learned this in college. However it is not accurate today. This concept was used before the modern banking system almost 100 years ago.. today is much different with the federal reserve.
Why did SVB get into trouble because they parked "deposits" into long term instruments? Because banks do not "lend" "deposits." In fact banks, by law, do not take deposits nor do they make loans! Banks are in the business of buying securities. When you go to the bank and sign the loan contract you have created a security, a debt instrument, secured by the collateral put forth in the contract. The bank puts the contract on its ledger as an asset and on the debit side, it will type in the amount owed to you as an accounts payable liability, which they will call a customer deposit! The amount that the bank owes you is typed in out of thin air! Of course the money is cleared at the FED. Only banks can do this because of the banking license. You and I cannot hook into the FED banking system. Banks are not limited in lending by deposits.
As a finance and accounting major, I learned this in college. However it is not accurate today. This concept was used before the modern banking system almost 100 years ago.. today is much different with the federal reserve.
Thank you Todd, appreciate that.
Where can I get that calculator format he is using as I’m not getting how he’s getting those percentage amounts
He doesn`t explain himself in detail. The 66.7% is the difference in the interest rate of 15 less the bank paid to Kim @9% so 1.667 x 9 = 15%
Why did SVB get into trouble because they parked "deposits" into long term instruments?
Because banks do not "lend" "deposits."
In fact banks, by law, do not take deposits nor do they make loans!
Banks are in the business of buying securities.
When you go to the bank and sign the loan contract you have created a security, a debt instrument, secured by the collateral put forth in the contract.
The bank puts the contract on its ledger as an asset and on the debit side, it will type in the amount owed to you as an accounts payable liability, which they will call a customer deposit!
The amount that the bank owes you is typed in out of thin air!
Of course the money is cleared at the FED.
Only banks can do this because of the banking license.
You and I cannot hook into the FED banking system.
Banks are not limited in lending by deposits.