How the Money Market is affected by Lending Activities

While many state-controlled banks are largely funded by the government, there are far more commercial banks that operate with a profit-oriented nature. And while some businessmen establish their own banks and fund it through the revenue generated by other business entities, banks still get their main operational assets from the borrowing-lending cycle of its clients.

Banks only serve as a transaction point, an entity which serves the needs of people who want to safe keep their money and by people who need to borrow that money. Once the banks stabilize their finances, it is already operational. It starts with recruiting clients that are willing to save their money in that bank with the promise of gaining an interest rate per annum. This means that, the amount that is deposited to the bank will be multiplied by the interest percentage. This is how a person earns by simply letting his money sit still on the bank.

Well, actually the money is not really kept for too long there but is given to borrowers who agree to pay the loan in time—plus additional interest. The lender-borrower dynamics therefore generate revenue for the bank on top of other investments entered by the bank itself. Depending on how much the bank is earning, it will offer an interest rate that is amenable to both the bank and its clients.

Now, given the nature of the banking system, it is therefore important to know whether the cycle is successful in generating enough revenue. This is the problem with money markets nowadays. Because of the fact that most people resort to money market investments and its stable and secured ventures, the industry is cutting down on interest rates in order to make sure that they are prepared to shoulder the cost of any investment that fails under the money market system. And although the lender-borrower dynamics is taking place, it is still different from the usual set up within a banking institution.

The next best thing that people could do in order to help the money market system work out and have increased revenue is to increase the activities of the clients in the system. Money markets are already liquid but people are not really taking advantage of the highly-liquid, withdrawable assets in the money market investments. These assets can be withdrawn and used to fund other ventures. But, even though this is done in order to generate revenue, the interest rate is still lower than the rates of most banks so it is a preferable alternative when people are in need of financing for their ventures.

When the bank is already gaining more than its targeted revenue, people with money market accounts and other types of accounts may expect that the bank will increase its interest rates in the savings account sooner or later. This is obviously the immediate impact of the revenue boosting activity. Once the higher interest rate for savings is implemented, this will trigger another influx of people who want to take advantage of the high rates.  And the cycle continues.

While it sounds assumptive that more activity in lending and borrowing will immediately catapult the interest rates to unbelievable heights, it is as factual as the setting of the sun in west. The basic premise of banking is the interaction between those who have surplus assets that they want to keep in a bank and those with no money who need the resources of the savers. And the higher interest rates cannot be explained in any better way than this primary revenue-making cycle that happens in every banking institution around the world.