Jayson Lowe breaks down how banks profit from your deposits. You're an unsecured creditor earning 1% interest while banks lend your money at 3%+ and charge $77 to $360 yearly in fees. With just a 10% reserve, a $100 deposit becomes $468.50 in the banking system.
Questions this video answers
$77.40 per year
$191.40 per year
$360 per year
$468.50 total deposits (with $368.50 loaned out)
Bank of Nova Scotia: interest earned 29,700 (units implied millions) and interest paid 12,400; RBC: interest earned 34,083 and interest paid 14,000,048 (presenter denotes these as millions)
Chapters
When an individual or business deposits money with a bank, they lend that money and the bank pays the depositor money on that. But it's actually a loan. You actually become an unsecured creditor to the bank. You are likely giving the control of your money to someone else and they are charging you fees for managing it. And if you're lucky, they pay you a little bit of interest. But let's look at the amount they are charging today. And I gotta be very honest with you, when I put this presentation together, I was shocked actually how much it is right now. And if we take a look at it, I just put together a screenshot of all the current bank accounts from all these financial institutions of what they're charging. If I just take a look at using 6.45 as an example per month times 12, that's $77.40 per year just to have an account in there. And let's just also even know is that you know, you're also limited with the amount of transactions that you have to pay your money that you're being having to pay to access to. Well, what if you need something with more needs? While in that circumstance, if you want unlimited transactions, well now you've got to pay for it 15, 95, 12 times a year, that's $191 and 40 cents, almost $200. You even if you want to be more primo, then you're paying $30 times 12 and that's $360 per year just to maintain a premium account. Now fractional banking is a financial system in which deposit taking institutions like banks are required to keep as a reserve only a small fraction of all the money deposited with them. When an individual or business deposits money with a bank, they lend that money and the bank pays the depositor money on that. But it's actually a loan. You actually become an unsecured creditor to the bank. They set the rules on that interest to be paid when you deposit that money. And what unsecured creditor means is they don't actually really owe you anything. I mean they owe you. But I mean when that money that has been deposited with the bank is used by the bank, obviously I think we all know that it's used to start or originate loans for other customers who need financing. And so the deposit account owners who have lent their money to the bank can withdraw their money at any time. But in reality, at any given time, only a small fraction of that money that is initially deposited is available because it's been redeployed somewhere to be used. Well, why does fractional banking work? Well, the assumption is, is that not all depositors will demand their money at once. So this is why the main reason fractional banking exists or why it's possible. Now, there's a real good question that maybe you might want to think about is how safe is your money? Well, let me kind of show you some challenges that have happened a lot recently. And here's something that has really happened. China deploys tanks to protect banks from angry citizens seeking to withdraw savings. Widespread protests through China after 6 billion deposits reportedly vanished, prompting the CCP controlled banks to freeze withdrawals in April. And you would think a developed country with a GDP significantly larger than Canada wouldn't resort to this right now. Let's kind of walk through how fractional reserve banking works. You deposit $100. Well, here's what's happening. A customer deposits the $100 and the bank keeps a reserve of $10. And then they loan out $90. Well, that $90 gets loaned out to someone and then it goes into someone else's another bank account, which there's $90. And they follow that same formula of 10% and do $9 as a reserve. And now they've loaned out $81. And then now that $81 goes back into another bank as a deposit and they keep a reserve of 8.1. And now they've loaned out 72.9. And we follow that all the way from that $100 deposit across the six banks, we're able to have $468.50 as a deposit. Really what's in reserve is that $100 and they've loaned out $368.50. I'm sure if common citizens like us did this, well, things wouldn't look so good. But somehow that $100 was able to magically balloon to $468.50 called fractional reserve banking. And here's something that, you know, I just kind of want to share with you here is. Well, I think you know how much they pay you in terms of interest. They pay you about, if lucky, 1% of interest, depending on what type of vehicle you put it in. But when they lend you money, they definitely are not charging you a lot less than that 1%. They're charging you at least 3% in interest. How much did the banks make in 2020 in terms of the audited 2020 financial statements? If we kind of take a look at this in terms of all these banks and if you ever check out our YouTube channel, the Banker's Vault. You'll also see a video that our team, my team members Sarblo and Richard also put together and how much the banks make in 2020. Why was 2020 pivotal for me, just to highlight is if you remember the government imposed lockdowns on you and the banks flourished. If we take a look at how much interest that they earned, the bank of nova Scotia earned 29,700 and the interest that they paid was 12,400. RBC was 34,083. Interest paid was 14,000,048 for a profit of 20,008,35. Now this 20,008,35 is actually in millions of denoted in millions of dollars, meaning there's six more zeros that follows that. So that's $20 billion in interest that they've earned from the deposits that you've flowed to them or you deposited your money into it. They've taken your money to redeploy that to earn almost three times the money that you've lent them.
