Question by Chris: When a commercial bank lends money lends money?
When a commercial bank lends money through a checking account the money the bank lends comes from or belongs to?
Best answer:
Answer by John Bradley
The money comes from one of two places:
1. The bank’s deposit base (the money customers deposit with the bank).
2. Other funding sources, such as debt securitization (the selling of bonds backed by loans the bank makes).*
Option one is the “old” way of getting money to lend.
Option two is the “new” way of getting money to lend, though bank’s overreliance on alternative funding sources was recently shaken up quite a bit with the recent “credit crisis,” as many banks saw the market for debt-backed securities shrink (in other words, the number of people willing to buy these securities got smaller, and the ones that remain weren’t buying as many as before).
Banks are now increasingly relying on good old fashioned deposits as a source of money to lend, though debt securitization is here to stay.
*When you apply for a loan, the bank may require that you put up an asset of yours as security. This asset may be cash, a car, real estate, or anything else of value. Debt securitization works the same way. To the bank, a loan it issues is considered an asset, and as with all assets, this assett has a market value. Bank can raise money in the financial markets by selling bonds (loans payable by the bank) that is backed by the bank’s total portfolio of loans, in case the bank defaults on it’s debt.
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