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The five rules for successful stock investing Part 9

Banks possed an enviable spot in the global economy. They're funnel in the capital formation process and the engine that keeps the car humming. Without banks, corporation would struggle to scrounge up money | 17 Banks Banks possess an enviable spot in the global economy. They re the funnel in the capital formation process and the engine that keeps the car humming. Without banks corporations would struggle to scrounge up money to expand and consumers would face a near-insurmountable obstacle in their quest to buy a home or to profitably save and invest. Because the service that banks provide is so vital to long-term economic growth the banking industry is almost certain to grow in line with the world s total output no matter which sector generates the greatest need for capital. Whether the demand for money comes from an Industry such as technology or pharmaceuticals or consumers incessant demand for housing banks will benefit. The banking business model is simple. Banks receive money from depositors and the capital markets and lend to borrowers profiting from the difference or spread. If a bank borrows money from a depositor at 4 percent and lends it out at 6 percent the bank has earned a 2 percent spread which is called net interest income. Most banks also make money from basic fees and other services which is usually referred to as noninterest income. Combine net Craig Woker and Richard McCaffery with Pat Dorsey. 2J2 BANKS interest income and noninterest income to get net revenues a view of the bank s top line. That s the banking model. Banks have a number of inherent strengths that help create a competitive advantage. By assembling large diverse portfolios of loans banks reduce their risks and pass some of the resulting savings along to all borrowers thus lowering the cost of capital in the marketplace compared with what it would be if borrowers and lenders worked directly with one another.1 This unique advantage forms one of the bases for a strong and lasting economic moat for the banking industry. In addition the federal government has all but given the keys to the liquidity kingdom to banks by essentially subsidizing the banking industry. The federal government .