The banks always win, stupid
Banks borrow from the central bank at one rate and lend at a far higher one. That is how the business works and why housing props up the system.
English · Original discussion in Spanish · Published
Banking is about taking in money at one interest rate and lending it at a higher one, and in Spain housing is the asset that underpins that margin. Those without their own central bank or sovereign state are exposed to rules set by others.
The European Central Bank lends money to banks at one interest rate. Those banks then lend that same money to households and businesses at a considerably higher rate. The difference between what they pay for money and what they charge for it is, in essence, their margin. They do not bear the risk alone: they demand collateral and, if the loan goes wrong, they seize the guarantee.
## The margin business
A commercial bank borrows liquidity from the central bank at an official rate, say **1%**, and places it on the market at **3%**. That spread is its profit. In Spain this business rests on the culture of property ownership: housing is the asset backing most mortgages.
The **IMF**, the **ECB** and the **Federal Reserve** set the rules of the international financial system. Their recommendations shape governments' economic policy, which in turn legislates on housing, renting and credit.
## When the loan fails
If the debtor does not pay, the bank seizes the collateral. In Spain, some of these troubled assets have ended up in the hands of the **State** at a price set by valuers. The bank then buys back those same assets at knock-down prices. The risk is socialised and the profit privatised.
Property is valued according to criteria set by the banks themselves. That valuation determines how much is lent, how much is seized and at what price the collateral is sold.
## Monetary sovereignty
A country without its own central bank or fiscal sovereignty is tied to the decisions of others. Spain has not had its own currency since **1999**, when it adopted the **euro**. That limits its room for manoeuvre in a crisis.
The alternative, according to advocates of monetary sovereignty, is to have a central bank and a state that decide without external oversight. Without that, the room for manoeuvre shrinks.
This article describes general mechanisms of the financial system and does not constitute financial or legal advice.
The European Central Bank lends money to banks at one interest rate. Those banks then lend that same money to households and businesses at a considerably higher rate. The difference between what they pay for money and what they charge for it is, in essence, their margin. They do not bear the risk alone: they demand collateral and, if the loan goes wrong, they seize the guarantee.
## The margin business
A commercial bank borrows liquidity from the central bank at an official rate, say **1%**, and places it on the market at **3%**. That spread is its profit. In Spain this business rests on the culture of property ownership: housing is the asset backing most mortgages.
The **IMF**, the **ECB** and the **Federal Reserve** set the rules of the international financial system. Their recommendations shape governments' economic policy, which in turn legislates on housing, renting and credit.
## When the loan fails
If the debtor does not pay, the bank seizes the collateral. In Spain, some of these troubled assets have ended up in the hands of the **State** at a price set by valuers. The bank then buys back those same assets at knock-down prices. The risk is socialised and the profit privatised.
Property is valued according to criteria set by the banks themselves. That valuation determines how much is lent, how much is seized and at what price the collateral is sold.
## Monetary sovereignty
A country without its own central bank or fiscal sovereignty is tied to the decisions of others. Spain has not had its own currency since **1999**, when it adopted the **euro**. That limits its room for manoeuvre in a crisis.
The alternative, according to advocates of monetary sovereignty, is to have a central bank and a state that decide without external oversight. Without that, the room for manoeuvre shrinks.
This article describes general mechanisms of the financial system and does not constitute financial or legal advice.
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Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (0 replies).
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