© Reuters. A bank loan margin is the price of risk… Argument for ‘interest business’ when excessive
Banks are under heavy fire. There are accusations that he got a feast of money by taking part in a ‘usury business’. The interest rate on loans has risen significantly, which has increased the interest burden on borrowers, and thanks to this, banks have made record profits and paid incentives of over 1 trillion won to their employees. There is no way it will look pretty in the eyes of Jangsamyisa (張三李四). Even the president put pressure on the bank. The antipathy towards shores is deeply rooted. Medieval European priests considered it a sin to lend money and charge interest. Shakespeare portrayed the moneylender Shylock as a demon in Are banks bound to be hated? Banks play a vital role in the capitalist economy, although it is often true that banks magically multiply their money 10 times. The first is the money supply. Of course, central banks print money. However, if the monetary base supplied by the central bank is idle in the bank vault, the money will not be released on the market. The bank’s job is to keep the money flowing.
Banks don’t just let money circulate. money is called Let’s say the central bank prints 1 billion won in the main currency, and this money goes through a number of processes and goes into the hands of Mr. Kim. Mr. Kim deposited 1 billion won in bank A. The bank’s reserve requirement ratio is assumed to be 10%. One day, Mr Lee came to Bank A and borrowed 900 million won, excluding the 100 million won reserve. Lee bought the building owned by Park with this 900 million won. Mr. Park deposited 900 million won from the sale of the building in Bank B. Now, the money released on the market is 1.9 billion won, including Mr. Kim’s deposit of 1 billion won in bank A and the deposit of Mr. Park of 900 million won in B bank.
Bank B again lent Mr Choi 810 million won out of 900 million won, and Mr Choi deposited the money in Bank C. If this process is repeated, the currency supply increases to 10 billion after to win In this way, the process used by banks to increase the money supply through repeated deposits and loans is called ‘credit creation’.
The money multiplier is the ratio of the growing money supply to the money base. The money multiplier is the ratio of the reserve requirement. Therefore, when the reserve requirement ratio increases, the money supply decreases, and when the reserve requirement ratio decreases, the money supply increases. Another function of Reason Bank, which lends money to strangers, is ‘liquidity conversion’, which links short-term deposits and long-term loans. It simply acts as an intermediary between depositors and borrowers.
Depositors prefer short term deposits. They also want to be able to withdraw money at any time. This is because you may need money for unexpected things. On the other hand, lenders prefer long-term loans and don’t want someone asking them to pay back early. This is because it takes a certain amount of time to receive a loan and start a shop or make an investment in order to make a profit.
The role of banks is to bridge this gap and ensure that money flows from depositors to borrowers. Todd Buchholz said, “Interest rates bring people together.” Banks make it possible for money to flow between anonymous depositors and borrowers through interest rates.
The interest income earned by the bank can be said to be the price for the risk taken in brokering deposits and loans. However, debate continues as to what is the appropriate range of deposit-to-deposit returns. During last year’s base rate hike, banks raised the loan interest rate by more than the deposit rate, and then lowered the loan interest rate when the monetary authorities warned of ‘interest trading’. The risk of running a bank and trusting finance The ability of banks to convert short-term deposits into long-term loans operates on the premise that depositors do not withdraw their deposits all at once, in other words, that bank runs do not occur. When a bank run occurs, the bank is on the verge of bankruptcy. Douglas Diamond, a professor at the University of Chicago, and Philip Dig, a professor at the University of Washington, who won the Nobel Prize in economics last year, proved that bank runs can happen at any time. At the same time, the government or central bank provided deposit insurance as a countermeasure.
The most important thing for financial stability is to ensure that economic actors do not lose trust in the financial system. The government should be trusted as the government, and the banks should be trusted as the banks.
Reporter Yoo Seung-ho usho@hankyung.com
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