Views and facts From A Banker

Views and facts From A Banker

My wife has a friend who used to be a banker with Bank of America, and was a Sr. VP of Lending-Real Estate.

I recently asked her some questions on how lending works and how it applies to real estate lending.

Here is what she said. All banks borrow their monies from the federal reserve at a wholesale rate of interest. They relend those monies out at a higher rate of interest.

They make their profits from the spread that occurs. They repay the monies to the federal reserve.

They use deposit monies from customers to cover operating costs for the bank.

They get into trouble with the federal reserve when they cannot repay monies borrowed because of bad loans.

Once a certain amount of bad loans become part of that banks records, the banks credit rating gets lowered.

Once the rating drops to a certain level, the banks credit line is deactivated and once this occurs, they became insolvent and get closed.

The federal reserve retains assets their money went to fund and those assets are sold or assigned to another banking entity, to recover funds.

If a bank can escape troubles and remains solvent, they will not make the same kinds of loans until they are satisfied that the lending climate has changed and it is safe to return to lending.

The only reason this banker is no longer involved is because she is retired now.

Hope this sheds some light on how banks operate.