[cardguy]

For you fractional reserve banking obsessives. I always wonder why more people or groups don't set up their own banks?

If you can lend out (and charge interest) on nine dollars for every one dollar you have in reserve - it seems like a license to print money.

Indeed - if the mob or any other organisation ran a business on those lines it would be classed as a form of ponzi scheme.

But banks get away with it.

So - as a serious question - I wonder why people don't set up their own banks? Or why not have charities set up their own banks - and use the banking system as a tool for good and not as a tool for debt slavery.

Under fractional reserve banking - a bank can literally create money by just typing the figures into your bank account. Nothing else is actually required. So - it seems like an exciting world to be trying to start a business in.

Just wondering if others ever have this thought?

[n0000]

You are in competition with other banks just like any other business would be. This is what makes banks compete with each other(free checking, other perks) and what makes credit card companies also compete with each other. Let us take credit cards. Mine offers 2.5% cash back on purchases, but the fees they charge are only in the neighborhood of 25c per transaction + 3%. So the margin they are actually working with is .5% + 25 c for every transaction. The credit card companies probably lose money having me as a customer, it will not pay for the massive infrastructure necessary to process the credit card payments. They most likely make their money off of people who have 10k in credit card debt and only make the minimum payments. The issue with the banks over the last 5 years or so has been that they have large amounts of money that they could lend, but don't. The following graph shows the amount of money that could be lent out and multiplied through the money multiplier effect, but has not:



Here is the federal reserve data on that:

http://research.stlouisfed.org/fred2/series/EXCSRESNS

The reason for holding all of these excess reserves is that massive amounts of money were pumped into the banking system by the federal reserve, but there are few credit worthy people willing to borrow money right now.

Here is a more in depth article on the subject:

https://mises.org/daily/5574/On-the-Brin...y-Disaster

If you are interested in this stuff I would really recommend reading more on the Austrian school of Economics. They offer most of their books for free online because many of them don't believe in copyrights. The website is mises.org

So basically banks do print their own money when times are good by lending it out to people, but when people start defaulting on this debt they turn to the federal government to bail them out. There have been record numbers of banks going under in the last 7 years or so due to the excessive exposure to the real estate market.

[Glaucon]

Because the goverment mafia does not permit competition.

[cardguy]

I am not expecting an RVF'er to start up a bank exactly.

But - it does seem strange that some of the large left-wing political parties don't explore areas like this.

Because of fractional reserve banking - running a bank is exactly the same as having a license to print money.

That is a pretty powerful idea to get your head around.

[anonymous123]

(03-23-2014 08:20 AM)cardguy Wrote:  

So - as a serious question - I wonder why people don't set up their own banks?

Sometimes they do. I know someone that started a regional bank and it is doing well.

But, setting up this type of bank is actually a pretty low margin business. The regulatory and compliance burden is huge, so your idea of "printing money" isn't as sexy when you have to pay a high percentage of operating costs to fill out government paperwork on every dollar. Seriously, imagine starting a bank with only three people that actually generate revenue (say, loan guys and people opening accounts). Your back office support for these three revenue generators is probably 7 or 8 people deep out of the box. Then add to it that the CEO and CFO (founders/entrepreneurs in this case) will also be spending 50%+ of their time on regulatory compliance and other mundane paperwork...and now you have a big low margin paper pushing business.

Besides the above, here is my $.02 on this topic:
- Setting up this kind of business requires raising a LOT of money for a startup with low margins and probably slow growth
- A lot of this money will be required to just "sit there"
- People that have the capability to actually raise this kind of dough (not easy) will often look at this business model and say "life is too short, if I have to raise that much capital, I'm gonna go and do X with it that has higher returns and is more interesting"

Most people can't raise a big pile of capital for a startup, and that is the key barrier to entry in this business.

[Dr. Howard]

(03-23-2014 10:27 AM)anonymous123 Wrote:  

(03-23-2014 08:20 AM)cardguy Wrote:  

So - as a serious question - I wonder why people don't set up their own banks?

Sometimes they do. I know someone that started a regional bank and it is doing well.

But, setting up this type of bank is actually a pretty low margin business. The regulatory and compliance burden is huge, so your idea of "printing money" isn't as sexy when you have to pay a high percentage of operating costs to fill out government paperwork on every dollar. Seriously, imagine starting a bank with only three people that actually generate revenue (say, loan guys and people opening accounts). Your back office support for these three revenue generators is probably 7 or 8 people deep out of the box. Then add to it that the CEO and CFO (founders/entrepreneurs in this case) will also be spending 50%+ of their time on regulatory compliance and other mundane paperwork...and now you have a big low margin paper pushing business.

Besides the above, here is my $.02 on this topic:
- Setting up this kind of business requires raising a LOT of money for a startup with low margins and probably slow growth
- A lot of this money will be required to just "sit there"
- People that have the capability to actually raise this kind of dough (not easy) will often look at this business model and say "life is too short, if I have to raise that much capital, I'm gonna go and do X with it that has higher returns and is more interesting"

Most people can't raise a big pile of capital for a startup, and that is the key barrier to entry in this business.

Agreed, sometimes they do. I have done some work for a client that he and his other well off business friends started up very small local banks in the states they do business in. The customer service when I call for work on their accounts is of course amazing. This is what bothers me when people get all worked out about bad banking...well of course you are going to get bad banking when you go to a 'walmart' bank like bank of america. There are plenty of smaller and/or higher end service divisions of larger banks that i find very good to work with.

[Big Nilla]

It'd be great if credit unions chunked away at banks. But banks will never allow them to be serious competition.

[BIGINJAPAN]

(03-23-2014 12:02 PM)Big Nilla Wrote:  

It'd be great if credit unions chunked away at banks. But banks will never allow them to be serious competition.

It is not up to the banks.... Credit unions would rule the world if people got their heads out of their asses and transferred their money out of the big money center banks


As for starting a bank in Canada, I looked into it. It is impossible here. Unless i had it fronted by a woman or a minority. Otherwise the big 6 would never allow it. Even the gigantic mega banks around the world cannot get a foothold in Canada. Our banks control this entire economy and country from top to bottom and our charter doesn't allow competition.

[kosko]

It's hard to do in the established West. The mega banks largely grew to scale by swooping up every little bank around and all their assets. You need big time capital to play, and if you have that kind of capital then your dealing with big banks already and they will just squash you with quickness.

The ability with just capital has been squashed but people in masse can push credit unions or in many States, they can charter their own public State Bank. I believe either South or North Daktoa has one chartered actually.

You can start your own bank oversees in some areas though. A developer from my home town whom was originally from the Caribbean went back to a small as fuck country there and opened up a bank with 100-200k. That was all he needed and he found a niche for loans and a little bit of shit on this side. Supposedly he is doing really good and the bank has grown ten times over in its assets and capital it holds.

[Virtus]

you need about 25 mil free and clear. http://www.amazon.com/How-Your-Private-I...0761512713

[username]

I know a couple who was one of the founding partners in a local one branch community bank. I think they bought in for $25,000. After a few years of growth they sold out to a small regional bank and their branch became part of it while their shares gave them ownership in the regional bank. Another few years later a larger regional bank bought the small regional bank all while they keep their shares, I believe the original $25,000 investment is now close to half a million.

My parents were actually pitched to be investors but didn't do it. I don't blame them for not doing it though, I probably wouldn't have either at the time. I now know that couple (the one that invested in the bank) has a pretty good track record and if they came to me with an investment I would probably do it with them if they were involved.

[cardguy]

Yeah - I have always been interested in credit unions.

I keep meaning to research them to see if they would offer a better alternative to most people.