Most people know the traditional banking model, if only from George Bailey in It’s A Wonderful Life.
In simplified form: A bank takes deposits from savers, and pays them a low interest rate. Then it lends that money out to borrowers at a higher interest rate. The bank’s profits come from the difference between the rates.
Charming…but far from the truth for the modern bank. An article from NPR’s Planet Money looked into JPMorgan Chase, the largest bank in America, and found they do much more than that.
The two most important ‘extra’ activities are charging fees and the outright investing of their own money. Here is how it breaks down:
- $48 billion – interest from loans
- $35 billion – fees
- $11.5 billion – trading
A little less than half of the bank’s revenue comes from non-traditional banking activities (fees, trading). Not so bad, especially with trading accounting for so little. Remember, one of the root causes of the financial crisis was all the big banks exploding their trading. When the market collapsed so did they, but were “too big to fail” and we had to bail them out.
Suffice it to say that banking with deposits and loans is very hard (George Bailey nearly went under), add in too much trading and banks become very unstable.