Last week, most of the major banks reported a third quarter profit loss. This was expected, as new fees and regulations are chopping bank revenueswhat many may argue to be simply cutting a bloated industry down to size (an industry that allowed so many to get into copious amounts of unsecured debt). 

But as compelling as it may be to dance around shouting “shout burn, baby, burn” as these giant corporations watch inflated numbers go up in smoke, we must remember that their loss cannot be contained within the bank’s doors. 

In order to better understand how the banks bottom line affect’s our own, we’ve asked economist Phillip Graves, a professor at the University of Colorado, to lend us some insight.


Professor of Economics
Phillip Graves Why are the big banks reporting lower profits? What causes banks to lose profits?
Banks make money on the spread between the interest rates they pay to depositors and the interest rates they charge borrowers.  If they are losing money, it is likely because they are not making many loans–probably because of fears of default due to the recession, combined with the very low interest rates they can charge.  But, of course, such behavior prolongs the recession. 

How, if at all, does this affect the bank’s patrons? 
Banks have two sorts of patrons…those depositing money with them and those borrowing money from them.  As suggested above, those borrowing are not getting access to funds, while those depositing are getting very low interest rates on their deposits.

Will this have a greater effect on the overall economy?
The behavior described above prolongs the recession. 

Is there historical example of banks losing income?
Yes, thousands of banks failed in the Great Depression between 1929 and 1933, mostly because of panicky depositors attempts to take their money out of the banks–since the banks were fractional reserve banks (they loan out a large percentage of any deposits…see Wikipedia for more detail on this), the money wasn’t there and they had to close down.  Some loans were “callable” (could be called back by the banks) but doing that causes borrowing businesses to shut down, making the Depression last longer. 

Will this affect the average consumer? 
It affects the average consumer by prolonging the recession, since the idle balances in banks do not get invested in new plant and equipment.

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