Understanding banks
Originally banks were places that would guard your money and while they still guard money today’s banking industry has a crucial role as the main source of credit and so is a major driver of economic growth. They also allow individuals and businesses to move money around electronically to pay others and buy things.
There are three main types of banks:
- Retail banks (e.g. NAB) deal directly with the general public and make loans to mostly small and medium-sized businesses.
- Wholesale banks mostly transact with other banks and financial institutions.
- Merchant banks, known also as investment banks, raise funds for companies from the financial markets or private investors.
How do banks make money?
They make money just like any other business. The difference is that their product is money. In other words banks sell money, mostly in the form of loans. Their profit is the difference between what they pay in interest on your deposits and what you pay them in interest for the loan they made you. Banks also charge fees for services.
Where do banks get their money from?
Banks get most of their money from deposits. They keep a certain percentage of this sum aside in case people want their money and lend out the rest. They can also borrow money in the interbank lending market from other banks for which they are charged interest just like us.
Does the interbank lending market include foreign banks given that apparently most/all Australian banks “have to” raise their money from overseas and pay such high rates. How big is the overseas pool of funds and who dictates the rate of interest. I would have thought that since investment rates in US and Great Britain are so low those with money would be throwing it at Australian banks given they get a greater return not only on the interest rate but (certainly in the case of US) a bigger premium when converting $A back to $US – currently 6-7% premium.
Why do banks in this country not provide 20 or 30 year home loan terms like USA. As usual your just having a lend of us…. be honest for once
Hi, up to 40% of NAB’s funding comes from Wholesale markets, which means what’s happening in the European and UK economies has serious impact on our costs. During February 2012, NAB acquired $1.5 billion of new funding on the domestic bond market at a premium that is around 70 basis points higher than the last equivalent issue just 8 months ago. As funding costs continue to rise we are unable to continue to absorb all of these costs.
We do offer up to home loan terms of up to 30 years. If you’d like more information, please contact us. ^AB
so what role does the Reserve bank or other central bank with our mortgage interest rate…how do they affect us??
and what affects how the RBA set the interest rate, who are they to dictate how much interest we pay or not?
pls enlighten your customers
Hi Derick, our latest Money Basics blog article may help with this,
If I can help with anything else, feel free to email us at social.media@nab.com.au, thanks! ^AB
hello NAB, what is the size of your current total loan book? i.e. what kind of dent is 1.5 billion? what rate is NAB actually paying on that new 1.5 billion. telling us it’s 70 basis points more than a previous issue means nothing.??
Hi Cameron, we currently lend more than $350B for products including mortgages, credit cards, personal loans, business loans and lending to corporates – hope that helps! ^AB