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Group Member: Huy Manh Vu - Jordan Ka Leung Chai

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Group Member: Huy Manh Vu - Jordan Ka Leung Chai

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Introduction: In this pallet, we include articles, videos & images in each post and briefly summarize the ideas related to how the bank creates money and other interesting facts.

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In this imagine, we will be talking about Money Multiplier and the Reserve Ratio.  The Money Multiplier formula refers to how an initial deposit can lead to a bigger final increase in the total money supply. The money multiplier is a key element of the fractional banking system. For Reserve Ratio, it is defined as the percentage of deposits that banks keep in liquid reserves. This means that the bank reserves a certain percentage of the deposits the receive from their customer as physical cash and not digital (online) just for reassurance.
While I was doing my research, I found out that this formula was one of the foundations for the concept on how banks create money from scratch. It is a key element to understanding banks profits.

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Be careful when investing through your bank is what is this picture is about
It means that there are risks when you invest money into your bank , the banker may offer you with the lower rate than you suppose to get . So make sure know your rights, what are you signing for.

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This video mentions about the reserve baking system where the government let the bank can lend out 90% of the money but have to keep 10% in the bank in case the depositor want to get their money back.
it also illustrate the cycle of economy when a debt is created, the bank go to the fed to give the bank more money to lend out. The cycle repeat several times and based on reserve banking system.
A second way that money can created is through equity, such as when you buy a house in 2018 which cost 500 million dollars. In 2019, it worths 10000.000 dollar without any debt created by you. However, there is actually a long process of creating debts by other people, they lend money from the banks and buy a house and pay interest as morgate.
And gradually, as more and more people buying house near your area, it increases the value of your neighbourhood which eventually makes your house worth from 500k to 1million dollar.

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How Money Is Created Through The Banking System

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In this article, the authors affirm that money comes from  Bank of Canada or chartered banks: Toronto Dominion Bank(TD) and Royal Bank of Canada(RBC). It also mentions that Canadian banking system is one of the strongest & most stable worldwide which manage well after the crisis 2008.
The BOC(Bank of Canada) has important role in maintain the Canada economy, as it responsible for managing funds and monetary policy
BOC is only institution that can print money in Canada
When bank of Canada create money, the governent can use the funds for education, health, debt or taxes reduction, meanwhile, when chartered bank create money, it mainly goes to banks of shareholders.

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In Canada, new money comes from two places: the Bank of Canada (BOC) and chartered banks such as the Toronto Dominion Bank (TD) and the Royal Bank of Canada (RBC). The Canadian banking system is one of the most respected and stable banking systems worldwide. The Canadian government and central bank have managed the aftermath of the 2008 financial crisis more effectively than most of the other developed nations in the world.

The BOC was chartered under the Bank of Canada Act of 1935, initially as a privately owned corporation. It was legally deemed a federal Crown corporation in 1938, its shares being owned by the Canadian government.

The central role of the BOC is to maintain the financial and economic health and stability of Canada. Specifically, it is responsible for formulating monetary policy and managing funds and banking services for the federal government. It is the sole authorized issuer of Canadian currency, among other things.

Both chartered banks and the BOC have a legal right to print new money without a specific reason. The BOC has held the ability to print new money since its inception; however, chartered banks did not always have this right. Before the leadership of Canada's 18th Prime Minister, Brian Mulroney, from 1984 to 1993, all banks in Canada were required to maintain at least an 8% reserve. This allowed the banks to lend out the same money approximately 12 times over. Mulroney dropped the required reserve rate to 0%. Thus, banks can lend out any amount of money, whether they have something in the way of reserves to back it or not. Though the Bank of Canada is the only institution that can print money, chartered banks can create money by entering it into a ledger when they issue a loan.

The creation of money is inflationary, whether the BOC or a chartered bank create it. A certain amount of inflation is considered necessary to allow for an expanded economy to function. However, the federal government has effectively also given private banks some control over the money supply without accompanying government control. When the BOC creates money, the federal government can utilize the funds for various programs, including education, health, and defense. The funds can also be spent on the reduction of debt and taxes. When chartered banks create money, it goes primarily to the bank's shareholders.

The BOC prints money and then lends it to the federal government at a very low-interest rate. Because the federal government owns the BOC, it receives dividends, meaning it obtains the loan essentially interest-free.

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In Canada, new money comes from two places: the Bank of Canada (BOC) and chartered banks such as the Toronto Dominion Bank (TD) and the Royal Bank of Canada (RBC). The Canadian banking system is one of the most respected and stable banking systems worldwide.

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In this article, we will be talking about the ways in which banks make money and how do they keep on profiting. One of the statements said is, “A penny saved is a penny lent.” This goes back to the fundamental way banks make money. It essentially means that as every single dollar or cent that goes into the bank can be lent out as a loan in which this creates this cycle, where the bank generates their income and profits more and more in the end. Banks use depositors’ money to make loans. The amount of interest the banks collect on the loans is greater than the amount of interest they pay to customers and the difference is the banks’ profit. This type of transaction is how bank will never make a lost but always a profit because of the higher percentage rate when giving a loan.
In the next topic that the article discusses, it talks about fees that the banks charges. Another method that banks rakes in big cash is from fees. It talks about account fees, ATM fees, Penalty fees etc.
Account fees. It is basically a type of fee that banks charges simply to keep your account within their organization or banking firm. It cost the bank money to hold your account but it relatively small fee to them, but they charge higher to gain a profit. Banks can also add in more information to let the customer know that they are not being charged extra, such as maintenance cost etc.

ATM fees. There will be times where you cannot find your own banking firm ATM in which you have to compensate that for other ATM’s. In this situation, banks can charge a small fee for every transaction that occurs for this. The fee may be as small as $3 per transaction. It may seem like a small amount to a customer but as millions of people are using it, the money adds up a lot.
Penalty charges. Another way banks can generate extra money is by adding penalty fees on your credit cards that customers fail to pay on time. By simply failing to pay a certain amount monthly, banks can end up charging a ridiculous amount because you failed to pay the minimum requirement. This can range from $10 to even $50.

Commissions. Most banks will have investment divisions that often function as full-service brokerages. Of course, their commission fees for making trades are higher than most discount brokers.

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1. What did you learn about your topic that surprised you the most?

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1. What did you learn about your topic that surprised you the most?

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One thing that surprises me the most when I was researching my topic on how banks create money was that they create money from thin air, or one could say artificially. I never knew how banks make a profit until I researched on how they did. You essentially deposit just for the bank to loan out majority of your money and in return they used your money to earn a multiplier of it.

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2. Provide a real-life example of how this topic is relevant or interesting for you

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2. Provide a real-life example of how this topic is relevant or interesting for you

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This topic is interesting to me because I can have a deeper understanding of how banks work, how to avoid certain unnecessary fees that I may be charged and have an idea if I want to invest into banks using bonds etc. Avoiding certain fees that may be charged to my account can be prevented with the deeper understand I have while I was researching.

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3. If you could pass on your knowledge to a family member  or friend, what do you think is the most important thing to pass on?

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3. If you could pass on your knowledge to a family member  or friend, what do you think is the most important thing to pass on?

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The most important thing to pass on with the knowledge I gain during the time I was researching for this topic is the fees that the bank subtly charges you from time to time without you noticing. Many of us have been seeing how banks can charge us with random fees that we do not even understand where it came about. During my time understanding this topic, I wish to pass on this type of knowledge in hopes that I can prevent any excess charges from the bank to save more money.

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In this articles, the author talks about how the bank generate money from deposits & loan. 97% of the money exist in the economy is not actual cash, it is bank deposits.
new money is created when a person get a loan from a bank. and this method help the economy to grow by an average of 11.5%/year over the last 4 decades.
On the contrary, new loans come along with new debts, when the debt burden increase to a certain level, it can trigger financial crisis.

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Since 2010 Positive Money has been working to educate the public, politicians, economists and the media about where money comes from and how banks work.

Through our 45,000-strong network of supporters, and dozens of local groups around the UK, we work to educate ourselves and others in our local areas about how our money and banking system works.

Our team of researchers have written two books, several papers, and been published in academic journals, in our attempts to reach economists and the wider public.

And our policy and advocacy team work on educating and influencing MPs, political parties, and the media.

We also collaborate with other civil society organisations such as the New Economics Foundation, the Finance Innovation Lab, Rethinking Economics - an international student society working to reform economics teaching in universities - and Economy.

We have over 66,000 followers on Facebook and active engagement on Twitter.

One breakthrough for us came in 2014 when the Bank of England confirming what we'd been saying about how new money enters the economy. You can read more about our published a paper key achievements here.

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Since 2010 Positive Money has been working to educate the public, politicians, economists and the media about where money comes from and how banks work. Through our 45,000-strong network of supporters, and dozens of local groups around the UK, we work to educate ourselves and others in our local areas about how our money and banking system works.

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Within this article shows and states how do banks make money, their profits and who benefits from banks in the end. Generally, when banks make high profit returns, this is a good sign because they can indirectly give back to the community by providing jobs, better interest rates to their customers, donate a portion to charity and can help other banks or the government when a crisis falls.

Where do banks make their money? Banks generate their income by involving themselves within many lines of business to maximize their profits and to reduce the margin of error for a lost. They can be involved in personal and commercial banking, capital markets, wealth management and insurance etc. This amount of investment in other business helps to result in positive financial results which helps overall economy in Canada. Banks categorize their revenue into two areas based on how it is generated: net interest income and non-interest income:
Net interest income is created from a “spread.” This spread is simply the difference between the interest a bank earns on loans to customers and the interest paid to depositors and other creditors for the use of their money.

Non-interest income is the other way banks earn their profits. Banks earn this by providing a variety of services, including trading of securities, assisting companies to issue new equity financing, commissions on securities and wealth management. This income accounts for almost half of the percentage income revenue for banks.
When added together, this forms total revenue. To calculate the bank’s actual profits, several things must be considered such as the fees to maintain the bank, cost of operating their equipment, providing their staff etc. It is also known that taxes must be paid out of the total revenue.

Who benefits from banks in the end? Canadians do. This is simply because banks provide jobs, donate a considerable amount back and to help level the government with financial situations. With this in mind. We want banks to be profitable so that they can in return, benefit us greatly as well.

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The video talk about the origin of the bank and how it works based on calculated risks .Banking systems allow people to expand and grow their business, housing, etc..Turning unused saving funds into funds that society can use is what bank mainly do, but it also make profit from credit card business, exchange currencies, cash management services. Also, it mentions about the negative side if the bank give too much credit to loaners to maximize their profit, causing global financial crisis. The solution for that is credit union, which is far more efficient than traditional in terms of preventing from collapses.
One thing that is interesting to me is that the word “Bank” is come from the word “Banco” which means in Italian for “bench”, where people usually exchange their coin in 11th century.
The way they control risk when investing is very smart as they don't put "all the egg on 1 basket", they invest with other people and share the risk, if the project fail they will lose a bit of money but still have many other project succeed.

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In this video, it answers the question on how bank makes money from thin air and where does it come from. It states that banks create money artificially every day.
Banks will advertise to their customers on their percentage interest to attract more customer for higher loan rate. Customers then deposit their money in which they can use that specific money to loan out to other people or banks and add higher interest to circulate or in essential; create money. This is the profits that banks will make.  The more money banks can get a hold of, the more they can loan out which generate money from thin air or artificially.
It is also noted that the video takes about Money supply. For example, Person A deposits money into the bank and person B loans it out and the same situation continues, this creates a money supply where it increases the overall amount of it even though the original amount was from the person A depositing it. This is essentially also creating money from thin air.
The reason why I choose this video was because it was very pleasing to the viewer based on their animation and how they convey information to the audience. It was very detail and enjoyable to watch as well.

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Based on the video, we can tell that the bank creates money in four ways/requirement. Banks create money by earning a profit.
• Required Reserves. the minimum amount of money the banks must hold by law. This point is states that a bank must hold a certain percentage of the money that their customers deposited in case they want to withdraw some money back.
• Excess Reserves. Banks reserve over and above their required reserves in which they can use this to loan out. The excess money that the bank holds can be used to loan out to others to create a profit.
• Money Multiplier. This refers to how an initial deposit can lead to a bigger final increase in the total money supply.
• Fractional Reserve Banking. This is a system in which only a fraction of bank deposits is backed by actual cash on hand and available for withdrawal. This is done to essentially expand the economy by freeing capital for lending or loaning.
This video was very straight to the point as it was only a few minutes but held great key factors and example for people to understand without having to replay it over and over.

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How Banks Create Money - Macro Topic 4.4