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Loan defaults are very likely when you've lent out over a trillion dollars, with repayment over 30 years. Businesses (especially small ones) run into all kinds

by EGreg 5y ago

Loan defaults are very likely when you've lent out over a trillion dollars, with repayment over 30 years. Businesses (especially small ones) run into all kinds of things during a 30 year stretch. Also, what about loan forgiveness, what happens to that money?

Retric 5y ago
Loan defaults are only a problem when they are faster than your ROI. Aka if you loan 1T dollars and get 50B in interest payments after expenses and 40B in loan defaults you didn’t lose money.
- EGreg 5y ago
  I disagree. Let's say a bank issues some Principal amount P of money, which is then used to pay various participants in the economy. The bank now has liabilities to pay out. Then the borrower defaults. The lender may have received some percentage of P in interest, but unless that percentage is greater than 100%, the lender lost money when the borrower defaulted. They now have to make up the difference somehow, and may become insolvent.
  - jboy55 5y ago
    The parent post contains a scenario where a bank has 1 T out in loans. If they make 50b (5%) in profit, they can withstand 4% of those loans going default. If profit goes up, and they can have more go default, and, get this, they charge more interest on loans more likely to go into default to cover this. They may even look at historical rates of insolvency and make sure they charge interest so that they make enough profit to cover any losses. Certainly this can go sideways when they don't understand the risk in one type of loan, like 2007-2008, but most of the time, they can figure this out.
  - deleted 5y ago
    [deleted]
  - Retric 5y ago
    First banks don’t actually issue money, people treat the IOU from a bank in their checking or savings account as money but it is an IOU. This is why economists use M0 vs M1 vs M2 vs M3 etc Second Banks want to have outstanding loans. They are going to issue new ones as the old ones are paid off. Therefore cash on hand + outstanding loans get modified by defaults, new loans, principal payments, and interest payments. Suppose from that 1,000B in loans they got 5B in interest, 3B in principle payments, and had 4B in defaults and issued 7B in new loans. They now have 1,000 - 3 - 4 + 7 = 1,000B in loans and an extra 5 + 3 - 7B = 1B in cash. Those changes can be calculated on a day by daily, monthly, or yearly basis, but dividends means a bank can make money in some year and still fail. Which is why regulators care about bank reserves not profitability.
wolverine876 5y ago
Yet our banking system actually works very well with long term loans.

by EGreg 5y ago

Retric 5y ago

Loan defaults are only a problem when they are faster than your ROI. Aka if you loan 1T dollars and get 50B in interest payments after expenses and 40B in loan defaults you didn’t lose money.

EGreg 5y ago
I disagree. Let's say a bank issues some Principal amount P of money, which is then used to pay various participants in the economy. The bank now has liabilities to pay out. Then the borrower defaults. The lender may have received some percentage of P in interest, but unless that percentage is greater than 100%, the lender lost money when the borrower defaulted. They now have to make up the difference somehow, and may become insolvent.
- jboy55 5y ago
  The parent post contains a scenario where a bank has 1 T out in loans. If they make 50b (5%) in profit, they can withstand 4% of those loans going default. If profit goes up, and they can have more go default, and, get this, they charge more interest on loans more likely to go into default to cover this. They may even look at historical rates of insolvency and make sure they charge interest so that they make enough profit to cover any losses. Certainly this can go sideways when they don't understand the risk in one type of loan, like 2007-2008, but most of the time, they can figure this out.
- deleted 5y ago
  [deleted]
- Retric 5y ago
  First banks don’t actually issue money, people treat the IOU from a bank in their checking or savings account as money but it is an IOU. This is why economists use M0 vs M1 vs M2 vs M3 etc Second Banks want to have outstanding loans. They are going to issue new ones as the old ones are paid off. Therefore cash on hand + outstanding loans get modified by defaults, new loans, principal payments, and interest payments. Suppose from that 1,000B in loans they got 5B in interest, 3B in principle payments, and had 4B in defaults and issued 7B in new loans. They now have 1,000 - 3 - 4 + 7 = 1,000B in loans and an extra 5 + 3 - 7B = 1B in cash. Those changes can be calculated on a day by daily, monthly, or yearly basis, but dividends means a bank can make money in some year and still fail. Which is why regulators care about bank reserves not profitability.

wolverine876 5y ago

Yet our banking system actually works very well with long term loans.