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
#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.
ReplyDeleteA 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.
ReplyDeleteFirst break *all* the rules.