UK Bank Holidays

Interest Rates and Banks
Most people seem to think that banks earn their spread by borrowing at short-term, variable interest rates and lending at long-term fixed rates. This conventional wisdom greatly overstates reality. Instead of simply playing the yield curve (the difference between short-term and long-term rates), banks tend to earn the bulk of their net interest income through credit spreads: the difference in rates between risk-free liabilities and risk-bearing assets.

Think of it this way: Individual depositors in Basic Bank & Trust’s hometown probably wouldn’t be willing to lend to businesses directly—there’d be too much risk involved with any single loan. Neither would businesses gain by borrowing from individuals in $500 or $5,000 increments; this would be complicated and costly. So Basic Bank & Trust, acting as an intermediary, steps into the breach and charges a spread for matching borrowers’ needs with depositors’ funds, as well as covering the risk that borrowers may fail to repay in full.

That isn’t to say that banks aren’t sensitive to interest rates; to some extent, every bank’s profits will be affected as rates rise and fall. Some institutions—such as savings and loans that hold long-term, fixed-rate mortgages—are much more sensitive to the yield curve than ordinary commercial or retail banks. Other bank executives may decide to make overt bets on the yield curve, usually to their peril. But the broader effect of interest rates on the average bank isn’t that much different than it is for the economy in general: Low interest rates encourage borrowing and allow banks to increase their assets faster; high rates have the opposite effect.

Bank Basics
Anyone with a checking account uk bank Holidays or car loan already knows the basic operations of a bank: It takes money from one group of people (depositors) and lends it to another group (borrowers). On the asset side, a bank may also own bonds and other securities.
On the liability side, a bank can issue bonds of its own or tap the short - term financing markets for additional funding.

Uk Bank Holidays In this way, a bank ’ s revenue and profits are directly tied to its balance sheet, much more so than at the average business. The difference between what a bank earns on its assets and what it pays on its liabilities is called net interest income . The ancient creed of bankers — “ Borrow at 3, lend at 6, play golf at 3” — still applies today, even if the figures themselves might be a little different. To illustrate the basic operations of a bank — with round numbers that you won ’ t find in the real world — I ’ ve decided to make one up. (See Figure A3.1 .) Why not call it Basic Bank & Trust?
For this very simple example, we find (1) $ 100 million of loans throwing off $ 7 million in interest income (a 7 percent rate of return), and (2) $ 90 million of liabilities on which the bank pays a 3 percent rate of interest, $ 2.7 million in all. The raw difference between the interest rate the bank earns on its assets and what it pays on its liabilities is the net interest spread. With Basic Bank & Trust earning 7 percent and paying 3 percent, the net interest spread is simply 4 percent.
A bank also requires shareholders ’ equity to operate. One of the key features of a balance sheet — not just a bank ’ s, but any corporation ’ s — is that while liabilities are fixed, the value of the assets may change. If Basic Bank & Trust tried to do business without equity — $ 100 million in both assets and liabilities — then even a small decline in the value of its assets would render it insolvent. Equity provides both depositors and shareholders with much - needed room for error. A bank ’ s equity/assets ratio is thus a key indicator of solvency and financial strength.


Noninterest income . Basic Bank & Trust doesn ’ t just take deposits and make loans; it also charges fees for other services. Everything from overdraft charges on checking accounts to activities ranging from investment advisory and insurance brokerage goes into this figure. Adding net interest income to noninterest income represents a bank ’ s total revenue, or net revenue .
Provision for loan losses . No well - run bank wants to lend money that it can ’ t expect to be paid back in full, with interest. But some loans, no matter how conservatively made, will go bad. When they do, these losses decrease the bank ’ s net income.
Noninterest expense . Tellers, clerks, loan officers, and bank presidents don ’ t work for free. These costs, plus rent, utilities, and any other operating expenses, are also deducted from revenue.
Income taxes . Like any other corporation, Basic Bank & Trust will have to pay income taxes on its profits.

Utilities
are the traditional refuge of stock investors seeking stable income and reasonably stable share prices. Even during recessions, people have to heat their homes, take showers, and keep that TV set aglow. Neither are utilities great growth businesses, so the industry has a long history of paying out most of its earnings to shareholders. It ’ s also one of those endlessly relatable industries, since most Americans shell out money to one or more publicly traded utilities every month. While the industry picture is more complicated than one might expect and, at least as of this writing, utility stocks are very expensive by historical standards, a well - uk bank holidays - run utility can still be a dividend seeker ’ s best friend.

Utility Dividend: Is It Safe?
Relative to other bastions of dividend income, such as banks, I look at utilities as notable mostly for how often they disappoint loyal, conservative shareholders with dividend cuts. Not every quarter or every year, mind you, but look far enough back in a utility ’ s dividend record, and you ’ re probably as likely as not to find a cutback. Even utilities regarded as industry standard - bearers, from Ohio ’ s American Electric Power (AEP) to Consolidated Edison (ED), have had to trim or eliminate shareholder payouts. Even though these firms are supposedly guaranteed a fair return on their capital investments, bad regulatory relations, bad capital investments, and excessive debt are among the many factors that can prompt a cutback or even elimination of the dividend.