How do banks work?


How do they become so powerful, and how do they grow?

Edit:to clarifyn i know how the process of banking works, I mean like how do you get from being a small local bank to JP morgan chase in new york. How do they possess the power to repossess property.

In: Economics

Hello there I can hold your money for u and keep it safe for only $10 a month and I’ll give you 10cents a month for every $1000 bucks u let me hold

Banks don’t just throw your money in a vault and let it sit there. They take the money you give them and invest it. This is usually in the form of loans. Things like car loans and mortgages that they charge interest on.

When you put money in the bank, the balance they show you is more of an IOU than a statement of how much money you have.

Banks mostly were local back in the day. Clearly, it’d be easier for Chase to grow larger due to being in New York City, where there are more and wealthier people. As there became benefits to being regional or national, and banking regulations allowed growth across state lines, etc. then bigger banks began acquiring smaller banks in markets they weren’t in… a lot of this only happened in the last 30 years or so. I opened my first bank account with a local bank in the early 1990’s and that account went through 5 different owners — the local bank I opened it with, which became First Chicago, then First Chicago NBD, then Bank One, then Chase — in the 15 years or so it was open. There were similar banking mergers playing out elsewhere, where local banks joined forced into regional banks, which merged with other regional banks, and then got bought up by national banks. Also, changes in Federal banking laws allowed commercial banks to merge with investment banks, so JP Morgan was able to merge with Chase, Bank of American and Merrill-Lynch merged, etc.

As for power to repossess property, they are lenders who let borrowers take out loans and require that those loans be backed by collateral. For example, you buy a house and the bank issues a mortgage, which is a loan using that property as the collateral. If you cannot pay your loan as specified in the mortgage agreement, then they can take back the house because that is the recourse or lack of payment as spelled out in the documents you sign.

[UChicago’s business school uses this scene from It’s a Wonderful Life to explain how banks work](

TL;DR they put money to work in the form of loans, the money for those loans comes from deposits, and the profit comes from interest made off the loans.