In analysis, it’s helpful to simplify and focus on the core elements of a system. Today, we will identify the essential processes and structures required to create a functional bank, accompanied by diagrams to illustrate these key processes.
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A Framework for a Basic BankNeilW
2 comments:
#5 Loan Defaults is blatantly false. Loan defaults are not distributed across depositors’ accounts except in the situation where the bank is insolvent AND being liquidated. And even in those situations a depositor is basically just a creditor of the bank and bankruptcy rules/laws and banking regulations would dictate how the net loss is distributed which may not be equal across all creditor classes.
A normal, healthy and solvent bank still faces loan defaults and in those default situations they effectively writes-off those loses against its equity. Operationally the bank holds what are known as Loan Loss Reserves and they are held as a negative asset on their books (where a negative asset is effectively an accounting equity position). When a loan defaults the loan note (asset) is credited and the loan loss reserve account (asset) is debited.
It's perfectly true. We even have a name for them in the UK. They are called 'Building Societies'. Remember here I'm doing a basic framework. You're already in one that has regulation to try and stop the basic framework arising.
First break *all* the rules.
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