Download Graphic Text CIRCLE 1 How Banks Work Arrow 1 (Title of Arrow

Graphic Text
CIRCLE 1
How Banks Work
Arrow 1 (Title of Arrow: Deposits):
Text Box: Banks receive deposits from corporate and individual clients. Banks have to “pay” for
these deposits through interest paid out to their clients.
Arrow 2 (Title of Arrow: Lending):
Banks use deposits and their earnings to lend to either consumer or corporate clients. (Banks can
also use bonds, direct loans from other banks or repo agreements -- selling assets to another bank
for short-term funding -- to fund activity.)
Arrow 3 (Title of Arrow: Profit):
Banks make a profit from interest paid on their loans. The difference between the interest earned
from loans and interest paid to client deposits determines a bank's level of profitability.
Arrow 4 (Title of Arrow: Economic Activity):
Corporate customers generate profit through business activity, and consumers earn wages. This
allows bank clients to repay their debts and deposit more money in the bank.
Arrow 5 (Title of Arrow: Bank Receives More Funds)
Arrow 6 (Title of Arrow: Builds Assets Independent of Deposits)
Arrow 7 (Title of Arrow: More Lending)
CIRCLE 2
How Greek Banks Abroad Work
Arrow 1 (Title of Arrow: Lack of Deposits):
Text Box: Lack of domestic deposits leads Greek banks in foreign countries to depend on funds
forwarded to them by their parent banks. Loan-to-deposit ratios in some of the Greek
subsidiaries exceed 180 percent, indicating that they are dependent on sources of funding outside
of domestic deposits.
Arrow 2 (Title of Arrow: Lending)
Text Box: To encourage customers in non-euro countries to borrow money, many eurozone
banks turned to issuing euro-denominated loans whose interest rates were low, especially
compared to high interest rates in the Balkans. Greek banks were particularly aggressive,
offering ever lower interest rates to undercut their larger Italian and Austrian competitors in the
region.
Arrow 3 (Title of Arrow: Profit):
Text Box: Banks make a profit from interest paid on their loans. Because Greek banks are using
euros they borrowed abroad at low interest rates, they are making considerable profit by lending
to consumers in Serbia, Bulgaria and Romania.
Arrow 4 (Title of Arrow: Economic Activity):
Text Box: Corporate customers generate profit through business activity, and consumers earn
wages. This allows bank clients to repay their debts and deposit more money in the bank.
Arrow 5 (Title of Arrow: Bank Receives More Funds)
Arrow 6 (Title of Arrow: Builds Assets Independent of Deposits)
Arrow 7 (Title of Arrow: More Lending)
CIRCLE 3
Greek Banks Abroad When Economic Crisis Strikes
Arrow 1 (Title of Arrow: Lack of Deposits):
Text Box: Greek parent banks are in trouble because their profitability decreases at home.
Government austerity measures are reducing economic activity, and thus money-making
opportunities, in Greece. This makes it harder for Greek banks to funnel money to their
subsidiaries, which depend on that funding for business activity. Greek banks are also in danger
of not being able to tap various European Central Bank liquidity provisions as Greek sovereign
debt, which the banks use as collateral, loses its credit rating.
Arrow 2 (Title of Arrow: Lending)
Text Box: Foreign currency lending dries up as domestic currencies in Romania, Bulgaria and
Serbia fall due to the crisis. With depreciation of domestic currency, loans taken out in euros
appreciate in value. Foreign currency lending even temporarily stops in some countries
(Romania and Bulgaria), eliminating a key way for banks to make profit.
Arrow 3 (Title of Arrow: Profit)
Text Box: As economic activity declines due to the crisis, banks make less profit as fewer
people demand loans.
Arrow 4 (Title of Arrow: Economic Activity):
Bulgaria, Romania and Serbia had 2009 gross domestic product (GDP) declines of 5.9 percent, 8
percent and 2.9 percent respectively. In 2010, GDP expected to decline by 1.1 percent in
Bulgaria and register minimal growth in Romania and Serbia, barring the return of a recession,
which is possible. In this environment, Greek banking subsidiaries will have difficulties making
profits.
Arrow 5 (Title of Arrow: Bank Receives Less Funds)
Text Box: Because Greek banks are receiving fewer deposits and less profit from local activity,
they become even more reliant on parent banks, which are having problems funding activity at
home, let alone abroad.
Arrow 6 (Title of Arrow: Builds Fewer Assets independent of deposits)
Arrow 7 (Title of Arrow: Less lending)