Banking Explained – Money and Credit

Summary

The international banking system, with over 30,000 banks holding vast assets, has evolved from medieval currency exchanges to a complex risk management business. Traditional banks now face competition from alternative financing models like investment banks, credit unions, crowdfunding, and microcredits, each offering unique approaches to serving clients and communities. These new models emphasize shared value, democratic control, and risk diversification, challenging the traditional banking paradigm and reshaping the financial landscape.

Takeaways

• 🏦 The international banking system consists of over 30,000 banks globally, with the top 10 holding around 25 trillion US-Dollars in assets.
• 📈 Banking originated in 11th century Italy to simplify trade by addressing the issue of multiple currencies in circulation.
• 💺 The term 'bank' comes from 'banco', Italian for 'bench', where merchants used to exchange money outdoors.
• 💼 Early banking models included home brokers providing credit and Genoese merchants developing cashless payments.
• 💰 Banks today are primarily in the risk management business, lending money at higher interest rates than they pay to depositors.
• 🏠 Banks play a crucial role in the economy by transforming unused savings into funds for purchasing assets and business expansion.
• 📉 The 2008 financial crisis was a result of banks engaging in high-risk financial constructs and lending practices.
• 🚨 Post-crisis, new regulations and emergency funds were implemented to prevent future banking collapses.
• 🌐 Alternative financing models like investment banks, credit unions, and crowdfunding are gaining popularity.
• 🔄 Credit unions focus on shared value and member benefits, which helped them survive the financial crisis better than traditional banks.
• 💵 Microcredits have become a significant business, providing small loans to help people in developing countries escape poverty.

Q & A

How many different banks are there worldwide?

There are more than 30,000 different banks worldwide.

What is the combined asset value of the top 10 banks?

The top 10 banks account for roughly 25 trillion US-Dollars in assets.

What was the original purpose of banks?

The original purpose of banks was to simplify life, particularly in the context of trade and currency exchange.

Where did the term 'bank' originate from?

The term 'bank' originates from the Italian word 'banco', which means 'bench', referring to the outdoor benches where money exchange took place.

How did the first banks manage risk in their operations?

Early banks managed risk by lending money at higher interest rates than they paid to depositors, accepting the calculated risk that some borrowers would default.

What are the main sources of income for banks today?

Banks' main sources of income include accepting saving deposits, credit card business, buying and selling currencies, custodial services, and cash management services.

What led to the global banking crisis of 2008?

The global banking crisis of 2008 was triggered by banks lending to borrowers with poor credit, leading to a collapse in the housing market and a subsequent drop in stock prices.

What measures were taken to prevent future banking crises after 2008?

New regulations were implemented, including mandatory bank emergency funds to absorb shocks and the creation of bailout packages to prevent bank bankruptcies.

How do credit unions differ from traditional banks in their approach to financial services?

Credit unions focus on shared value rather than profit maximization, aiming to help members create opportunities and invest back into communities, with members democratically electing the board of directors.

What is crowdfunding and how does it impact traditional banking?

Crowdfunding is a method where individuals or groups obtain funding for a project by collecting small amounts of money from a large number of people, often bypassing traditional banks and spreading risk among many investors.

What is the role of microcredits in developing countries?

Microcredits are very small loans given mostly in developing countries to help people escape poverty and start businesses, providing access to funds for those previously deemed unworthy by traditional banking standards.

Outlines

00:00

🏦 The Evolution and Role of Banks

This paragraph discusses the complexity and history of the international banking system, highlighting its origins in 11th century Italy and the development of banking practices to simplify trade and commerce. It explains how banks transitioned from facilitating currency exchange to becoming institutions for risk management, providing loans, and offering various financial services. The paragraph also touches on the issues with modern banking, such as the pursuit of short-term gains and the consequences of the 2008 financial crisis. It concludes by mentioning new financial models like investment banks, credit unions, and crowdfunding, which are gaining popularity as alternatives to traditional banking.

05:02

🌐 Alternative Financing Models

The second paragraph focuses on alternative financing models that are emerging as responses to the shortcomings of traditional banking. It discusses the rise of crowdfunding platforms that allow individuals to invest in ideas they believe in, spreading risk among a large number of small investors. The paragraph also highlights microcredit as a significant tool for economic development in developing countries, enabling people to start businesses and escape poverty. The summary emphasizes the importance of the banking sector in society and suggests that the future of banking will be shaped by the choices we make today.

Keywords

💡International Banking System

The international banking system refers to the global network of financial institutions that facilitate international trade, investment, and the flow of capital across borders. In the video, it is described as complex and enigmatic, with over 30,000 banks worldwide holding vast assets, highlighting its significance in the global economy.

💡Assets

Assets in the context of the video refer to the resources owned by banks, which include cash, investments, loans, and other financial instruments. The top 10 banks alone hold about 25 trillion US-Dollars in assets, emphasizing the immense scale and influence of these financial institutions.

💡Risk Management

Risk management is a process used by banks to identify, assess, and prioritize risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events. The video explains that banks are in the business of risk management, lending money at higher interest rates than they pay to depositors, accepting some level of default risk.

💡Credit

Credit is the trust that allows one party to borrow money or resources from another. In the video, it is mentioned that banks and merchants in the past developed cashless payments and credit networks, which evolved into the modern banking system. Credit is essential for economic growth, as it enables individuals and businesses to make purchases and investments that they might not otherwise afford.

💡Financial Crisis

A financial crisis is a situation where the value of financial assets drops rapidly and is often triggered by a broader economic collapse. The video references the 2008 financial crisis, which was caused by risky lending practices and the collapse of the housing market, leading to a global economic downturn and massive job losses.

💡Bailout Packages

Bailout packages are financial interventions by governments or other entities to rescue failing businesses or economic sectors. The video mentions that the US government and the European Union had to create large bailout packages to prevent major banks from going bankrupt during the 2008 financial crisis, illustrating the systemic importance of banks and the consequences of their failures.

💡Credit Unions

Credit unions are member-owned financial cooperatives that provide many of the same services as banks but with a focus on shared value rather than profit maximization. They are controlled by their members and aim to help members create opportunities like starting businesses or building homes. The video highlights credit unions as an alternative to traditional banks, noting their better survival during the financial crisis due to their member-centric approach.

💡Crowdfunding

Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the internet. The video discusses crowdfunding as a recent development that allows individuals to bypass traditional banks and obtain loans from groups of small investors, spreading risk and enabling the funding of various projects, including technology startups and creative endeavors.

💡Microcredit

Microcredit refers to the extension of small loans to low-income individuals who would otherwise have no other means of gaining financial services. It is often used to help people in developing countries start businesses and escape poverty. The video mentions microcredit as a multi-billion dollar business that has evolved from providing small loans to those previously deemed unworthy by traditional banking standards.

💡Regulations

Regulations are rules or directives made and maintained by an authority. In the context of the video, new regulations were implemented after the financial crisis to govern the banking industry and prevent future crises. These regulations include mandatory bank emergency funds and other measures to ensure stability, although some were blocked by the banking lobby.

💡Investment Banks

Investment banks are financial institutions that assist individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities. The video mentions new investment banks that charge a yearly fee and do not receive commissions on sales, aligning their interests with those of their clients and potentially offering a more sustainable and ethical financial service model.

Highlights

The international banking system consists of over 30,000 banks worldwide holding vast amounts of assets.

The top 10 banks account for approximately 25 trillion US-Dollars in assets.

Banking originated in 11th century Italy as a solution to the problem of multiple currencies in circulation.

The term 'bank' comes from the Italian word 'banco', meaning 'bench', where early money exchanges took place.

The evolution of banking included the development of home brokers giving credit and cashless payments by Genoese merchants.

Banks today are primarily in the risk management business, lending money at higher interest rates than they pay to depositors.

Banks play a crucial role in the economy by turning unused funds into resources for buying houses and business expansion.

Traditional banks have shifted towards short-term gains with higher risks, moving away from their original role.

The 2008 financial crisis was a result of banks engaging in risky financial constructs and lending practices.

The crisis led to a global banking crisis, massive job losses, and financial damage to economies and societies.

Governments and the European Union had to implement bailout packages and new regulations to stabilize the banking system.

Alternative financing models like investment banks and credit unions are gaining popularity, focusing on shared value and member benefits.

Credit unions, established in the 19th century, are democratically controlled by their members and survived the financial crisis better than traditional banks.

Crowdfunding platforms have emerged, allowing individuals to get loans from groups of small investors, bypassing traditional banks.

Microcredits, small loans given mostly in developing countries, have become a multi-billion dollar business, helping people escape poverty.

The future of banking and financing is uncertain, with various models competing to provide funds to people and businesses.

Transcripts

The international banking system is an enigma.

There are more than 30.000 different banks world wide, and they hold unbelievable amounts of assets.

The top 10 banks alone account for roughly 25 trillion US-Dollars.

Today, banking can seem very complex, but originally, the idea was to make life simpler.

11th century Italy was the centre of European trading.

Merchants from all over the continent met to trade their goods, but there was one problem:

too many currencies in circulation.

In Pisa, merchants had to deal with seven different types of coins

and had to exchange their money constantly.

This exchange business, which commonly took place outdoors benches,

is where we get the word "bank" from;

from the word "banco", Italian for "bench".

The dangers of travelling, counterfeit money and the difficulty of getting a loan got people thinking.

It was time for a new business model:

home brokers started to give credit to businessmen,

while genevese merchants developed cashless payments.

Networks of banks spread all over Europe,

handing out credit even to the church, or European kings.

What about today ?

In a nutshell, banks are in the risk management business.

This is a simplified version of the way it works.

People keep their money in banks and receive a small amout of interest.

The bank takes this money, and lends it out at much higher interest rates.

It's a calculated risk, because some of the lenders will default on their credit.

This process is essential for our economic system,

because it provides ressources for people to buy things like houses,

or for industries to expand their businesses and grow.

So banks take funds that are unused by savers,

and turn them into funds society can use to do stuff.

Other sources of income for banks include accepting saving deposits,

the credit card business,

buying and selling currencies,

custodian business

and cash management services.

The main problem with banks nowadays is,

that a lot of them have abandoned their traditional role as providers of long-time financial products,

in favour of short-time gains that carry much higher risks.

During the financial boom, most major banks adopted financial constructs

that were barely comprehensable

and did their own trading in habit to make fast money,

and earn their executives and traders millions in bonuses.

This was nothing short of gambling and damaged whole economies and societies.

Like back in 2008,

when banks like Leeman Brothers gave credit to basically anyone who wanted to buy a house,

and thereby put the bank in an extremely dangerous risk position.

This led to the collapse of the housing market in the US and parts of Europe,

causing stock prices to plummet, which eventually led to a global banking crisis,

and one of the largest financial crises in history.

Hundreds of billions of dollars just evaporated.

Millions of people lost their jobs and lots of money.

Most of the world's major banks had to pay billions in fines

and bankers became some of the least trusted professionals.

The US government and the European Union had to put together huge bailout packages

to purchase bad assets and stop the banks from going bankrupt.

New regulations were put into force to govern the banking business,

compulsary bank emergency funds were enforced to absorb shocks in the event of another financial crisis.

But other pieces of tough new legislation were successfully blocked by the banking lobby.

Today, other models of providing financing are gaining ground fast.

Like new investment banks, that charge a yearly fee

and do not get commissions on sales, thus providing the motivation to act in the motivation in the best interests of their clients.

or credit unions - cooperative initiatives that were established in the 19th century

to circumvent credit sharks.

In a nutshell, they provide the same financial services as banks,

but focus on shared value rather than profit maximisation.

The self proclaimed goal is to help members create opportunities like starting small businesses,

expanding farms or building family homes

while investing back into communities.

They are controlled by their members, who also elect the board of directors democratically.

World wide, credit union systems vary significantly,

ranging from a handfull of members

to organisations with several billion US-Dollars

and hundreds of thousands of members.

The focus on benefits for their members impacts the risk credit unions are willing to take,

which explains why credit unions, although also hurting,

survived the last financial crisis way better than traditional banks.

Not to forget the explosion of crowdfunding in recent years.

Aside from making awesome video games possible,

platforms arosed that enabled people to get loans from large groups of small investors,

circumventing the bank as a middle man.

But it also works for industry -

lots of new technology companies started out on kickstarter or indiegogo.

The funding individual gets the satisfaction of being part of a bigger thing,

and can invest in ideas they believe in.

While spreading the risk so widely, that, if the project fails, the damage is limited.

And last but not least, micro credits.

Lots of very small loans, mostly handed out in developping countries that help people escape poverty.

People who were previously unable to get access to the money they needed to start a business,

because they weren't deemed worth the time.

Nowadays, the granting of micro-credits has evolved into a multi-billion dollar business.

So, banking might not be up your street, but the banks' role of providing funds to people and businesses

is crucial for our society and has to be done.

Who will do it and how it will be done in the future is up for us to decide, though.