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Banks Making Money Trading, Losing Money on Credit Cards

June 30, 2009

By Andrew Freiburghouse | Money Rates Columnist

In past ages, describing the business model of a bank was simple: banks take deposits from savers, then make loans to borrowers.

In the brave new world of finance, though, the business models of banks, especially certain banks, has become much more complex.

Here are two areas of interest right now:

Banks Making Money by Trading (Yes, Including Derivatives)

Despite the warnings of Warren Buffett that derivatives are "weapons of mass financial destruction," the banking industry continues to traffic in--and profit from--these complex financial instruments.

In fact, during the first quarter of 2009, banks coralled $9.8 billion in revenue from trading derivatives and cash instruments.

Banks Losing Money on Credit Cards

Meanwhile, banks are taking a beating on credit cards. In May of 2009, credit card default rates hit 10.1 percent. Experts forecast that default rates will rise above 11 percent during 2010.

Not a Cause for Panic, Just a Call to Be Aware

There is no compelling reason for a conservative depositor to pull money from a bank savings account or CD just because that particular bank is making money trading derivatives and losing money on consumer credit.

However, there is a compelling reason for depositors to learn about the business models of the institutions they trust to take care of their cash. It's great to have FDIC insurance, but even better to never have to use it.

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