Estimated reading time: 2 minutes
It’s a banking movie.
Remember the scene where everyone comes running into the bank wanting their money?
In just a few sentences, George explains the fundamentals of banking better than I’ve ever seen.
“You’re thinking of this place all wrong!
The money’s not here.
Your money’s in Joe’s house.
That’s right next to yours.
And then the Kennedy house and Mrs. Macklin’s house and a hundred others.
You’re lending them the money to build and then they’re going to pay it back to you as best they can.”
Or – The business of banking is borrowing money from depositors and lending it out to borrowers.
It ends up being quite the low-margin business (~1% Return on Assets).
But fueled by significant leverage (10-30% balance sheet leverage), banks are able to achieve a decent, but not stellar overall return (10 – 30% Return on Equity).
The majority of that gross margin goes to:
✅ The Bank Building
✅ Computer Systems
What remains allows the bank to provide its shareholders a return on investment.
Just because banks HANDLE a lot of money, doesn’t mean they HAVE a lot of money.
In fact, it’s Joe, Kennedy, Mrs. Macklin, and a hundred other people that have your money.
Not the bank.
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