B is for Banking

Banks are like good hygiene, like brushing teeth and wearing underwear. A thankless resource, though someone needs to do it. People don’t like bankers, but they need them. People don’t like bankers because they need them. I explained why in the second post I ever wrote. But how does banking work?

Gringott’s Vault at Warner Bros. Studio tours, London

What Is a Bank?

Essentially, banks take your money and give it to somebody else. You could put your money in a sock under the mattress, but it’s a bit safer to choose someplace with big steel vault doors and complicated locks. Like Gringott’s. A bank might hold a Philosopher’s Stone, the royal treasury of the Lannisters, or the wealth of the InterGalactic Empire (who had Storm Troopers handling security). Modern banks spend huge sums on strong encryption systems–online vault doors–to keep your money safe.

Suppose your cousin Marvin wants to open a business, a combination sushi and ice cream store. Hey, they both need ice, right?! That’s Marvin’s business plan. The bank gives your money to Marvin as a loan.

Two problems here. First, Marvin may need more dough than your puny deposits, so the bank has to convince more friends and gather enough deposits in order to give out loans. Secondly, you may need some of your money back before Marvin can attract enough customers. He’s trying–he’s got the slogan: Come for the Eels, Stay for the Sprinkles! This is called a problem of liquidity.

Photo Alistair Sim Scrooge
Your Friendly Banker, Scrooge courtesy of Daily Gazette.

The bank needs more deposits and makes more loans, perhaps to your other cousin, Daniella, who has a smashing idea to customize body wigs for poodles when they get over-clipped. But the bank still has to stick cash in the ATM so you can get your food truck burritos. Crazy ideas take a while to pay the loans back. Banks need a steady trickle of funds to give to depositors who need cash. That’s where interest comes in.

Paying Interest is Against My Religion

However, one stumbling blocks for banks in the past was that religions–Catholics and Muslims–prohibited charging interest, calling it Usury. Usury today means high interest, usually the 25% a week that Vinnie from that dodgy neighborhood charges. Vinnie doesn’t have vaults and ordinary deposits; he gets his cash from other sources (that’s wordsmithing for opiod sales). That is the difference between a bank and a loan shark.

In the past, usury meant any interest. How could banks exist, without charging interest? European banks handled currency exchange, establishing rates between cities who had their own coinage (e.g. Florence, florins). Bank profit was embedded in the exchange rate. It helped if you could run the city, run the bank, have your own coinage, and charge fees, like the Medicis.

Cosmo de Medici, photo from renaissancehistory9.blogspot.com.

It helped when the Pope would put money in your bank, too. It really helped when one of the banking family became Pope.

The Protestants didn’t have the same hangups over interest, and the Germans built up their own, strong, interest-charging banks. However, medieval Catholics didn’t want to put their money in Protestant banks. When the Medicis and others declined, they had to go somewhere. That somewhere was Switzerland.

Sprechen Sie Unbekannt?

The Swiss didn’t start out neutral or bankers. They grew post-Renaissance, when the Catholics starting carting in the tithes over the Swiss mountains in the 1780s. The Swiss insured the deposits, which helped build their reputation for security. Because Switzerland is mountainous and landlocked, it was ideal for mining gold and diamonds and replacing the ore with reinforced strongholds for bank vaults.

goblin banker
Goblin? or Swiss? banker photo from harrypotter.fandom.com.

In 1713, the Swiss outlawed disclosing information about the source of banking funds, creating their famous bank secrecy. After Napoleon was defeated, the princes of Europe re-carved all the boundaries in the 1815 Congress of Vienna, and Switzerland talked their way into being established as a neutral country. When I was young, I thought it was really noble of Switzerland to not take sides in wars. After absorbing lots of spy novels, I learned that meant the Swiss would take anybody’s money–Hitler’s, Napoleon’s, Jews, Catholics, weapons manufacturers, Greenpeace–whoever. And they’d never tell.

Basel Is Not an Herb

This is where Basel comes in, Basel being both a town in Switzerland (famous for its fine art–wonder if any of it was stolen from Jews? that’s another movie...) and a series of key banking regulations created after the 1970s. The Basel accords tell banks that they need to hold enough capital–let’s call it cash that isn’t tied up in a loan–in case depositors need it. A bank might have tons of loans…”assets”… on its books. But if those are, say, all to Marvin and Daniella, or home mortgages made to borrowers who never could afford it, and the real estate market drops, then what the bank “owns” isn’t worth a yardful of weeds. Thus, banks need to enough money aside so you can go to the ATM whenever you want. Why they all agreed to let the Swiss set the rules, I don’t know, but the Swiss aren’t telling. They never do.

That, in a nutshell, is how international finance works.

B is for Banking

8 Replies to “B is for Banking”

  1. Where does, and where has, the Federal Reserve come in (functionally rather than in terms of the early 20th century and Jekyll Island)? I hadn’t heard of the Swiss rules originating after the 1970s — had heard of the concept but not that such a basic rule as holding sufficient capital came so late. I don’t know how you do it, but you make everything on which you write interesting. And now I will know the general topic when I hear of accords named for Basel.

  2. First of all, it’s been a rough week, so I REALLY appreciate your comment. I wasn’t sure it was a great idea to do the A to Z, but you’re convincing me to go on, so thank you.

    I’m trying not to get carried away (make my posts too long), so I didn’t even get into the Monetary Supply, which is where the Fed comes in. The Fed plays a lot of roles, but a big one is in reducing banking panics — where the depositors go running to the bank all at once to “get their money.” Since the bank has loaned most of it out to Marvin and friends, it doesn’t have the cash… if the depositors are insistent, then the bank goes bankrupt and no one gets anything. (See “It’s a Wonderful Life.”) The Fed’s role is to tell everyone to calm down, to tell the small investors they’ll at least get Something (FDIC insurance), and to lend taxpayer money to any bank that might be in that situation just to quell the panic. There’s more to it, but that’s the gist. It was hella scary to be working in a bank when the panic hit in 2009–my employer was “helped” by the Fed to merge with other banks that hurt “us” for years, and I was laid off. But I got hired back, did well, and I’m all better now, and even retired early, so devil-may-care me now!

    1. Congratulations on retiring early (after making it through the panic of 2009 intact). And thank you for that answer (on the Federal Reserve Bank). I knew FDIC insurance is important, but I guess I hadn’t put two and two together that “The Fed” (being that Bank) is the institution that pays it — or lends it to the banks when that comes up so a local/individual bank can pay it.

      Perhaps you’ll do “Monetary Supply” for M or S (or some other letter if there’s another way to convey largely the same thing). Or not; you may well have all your letters figured out already.

      I hope this week is going better for you.

  3. Actuaries are very specialized (like tax accounting). They calculate how people’s lifespans affect various financial models. So they get $$$$ if and when they find jobs. Accountants get paid $$ but there are tons of different ways to go–financial accounting, small-business accounting, tax accounting… and from accounting you can jump into data analytics, process design/industrial engineering, etc. So I think Accounting is a FAR better jack-of-all-trades. But I might think someone could take a Masters in Accounting to get a job AS an actuary, with additional certifications. I don’t “think” you get (or should) get a degree in being in Actuary, but you could specialize in it. It would limit your options. Kind of like being an astronaut as opposed to a pilot.

    1. Hey, thanks for that input. I was reading about actuaries online, a day or two ago, and saw a figure of like a total 5000 or so actuaries. I don’t remember if I was on an Australian site or an American (United States specifically) site at the time, but I’d assume the number was for whichever country it was. There can’t only be a total 5000 in the world. Or can there? Anyway, I think you’re right about majoring in accounting (being the better idea) and then (if interested) getting additional certification or specializing. We shall see what that one gets into.

      You’ve piqued my curiosity by mentioning
      process design and industrial engineering.

      First of all, process design just sounds very intriguing to me. Second, while the son who has just started majoring in accounting could be interested in any of the suggestions you brought up and more (the Treasury Department, for instance, but I’ll likely caution him on that), I have another son who started working toward an additional degree a few years ago but then let it go; he was going with industrial engineering after having gotten a bachelor in industrial design (after transferring from an almost-completed five-year master of architecture).

      If you find an extra minute, maybe after this month of working through the (alphabet) challenge you’ve taken on (or maybe on a Sunday), could you describe how you envision someone going from accounting to process design or industrial engineering? Like I said, it’s mainly curiosity on my part. That son (not the accounting one) is working for an industrial robotics company. They hired him to head IT (although IT wasn’t a major or minor of his); that’s one of his own personal driving interests. Now, he does a lot of things for them.

      1. Industrial engineering was the older term; process design is newer. Look up Six Sigma and statistical design because that, for the last twenty years, is the newer direction. Like accounting, it’s technical, requires study, but earns better because it reflects expertise. Unlike actuary work, process design can apply to ANYTHING. Actuary is really a specialized human resource function. Process design could be done in the medical field, technology/IT, customer service, or factor work.

        1. Thank you. I’m vaguely remembering that when he was going to study what he thought was industrial engineering he found out “that’s ‘something else’” — and he started into a subject area like mechanical engineering instead. I looked up six sigma (will also look up the other terms), and it seems like management… it reminded me of when I began down a road of “administration” (I was part-time thinking/studying public administration for myself for a couple or few years because a local school/university offshoot has a good program). He’s [this is the one who graduated in industrial design] kind of a quietly pushy (but polite) guy, and he’s shaping up the organization where he is without any management training; on top of doing design work, IT, and other things.

          😅

          I wonder if he will ever get a graduate degree. He’s putting a priority on his wife getting hers (while he can more casually get certificates in the meantime).

          The one who actually is in accounting (the study), however, has talked about an interest in auditing and may be open to a number of specialties. He has enjoyed statistics classes (in high school and with his bachelor degree). I see that Six Sigma puts an emphasis on statistics that the administration field might not usually do so much in general (while Wikipedia says, when I skipped down, “Lean management and Six Sigma are two concepts which share similar methodologies and tools. Both programs are Japanese-influenced, but they are two different programs. … Both systems are driven by data, though Six Sigma is much more dependent on accurate data.” 🤔).

          Right now, he works on data analysis for a well-known tax company; that company is paying for his schooling at this time. (He worked at a bankruptcy place previously.)

          1. I have something called a Six Sigma black belt, which is a certification for the discipline that you get through study and practical implementation. Not entirely Japanese other than some principles. Fundamentally, Six Sigma is an approach to looking at a process– any process — cars on an assembly-line, patients in a hospital. Mine was reducing call transfers in a bank call centers. You use data measurement, statistical tools, workflow views, and an understanding of human behavior to improve the process permanently. Might be a good approach for that second son to look at.

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