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Hello.  1-How big bank borrow from the fed 500 billions and pay it back in a day with interest rate ? (I read that bank lend it to Federal Government but still bank needs to pay it back to the fed )

2-what does consumer loan collateral means ? ( does it means that bank gives person $1000 loan and pledge it to the fed as consumer loan ? )


Banks frequently lend to each other using something called the overnight lending rate.  This means that the money that is being borrowed, is only going to be held overnight.  Why would a bank borrow money for only 1 night?  Well, banks make revenues by charging interest on loans, and these loans are funded by using the money that customers deposit in bank accounts.  The money in these bank accounts still belong to the customers, though, and not the bank.  So, if a bank's customers want to use their money, then the bank may end up with a shortage.  If a bank doesn't have enough money to pay back its own loans or pay its own bills, then it could go bankrupt.  In order to avoid this in the short-term, they can borrow from other banks which have a short-term surplus of cash.  Then, during the next day when business starts again, the bank will pay their overnight loan back using any combination of new deposits, consumer loan repayments, sold assets, or long-term debt.
The website Investopia has a pretty good video that might help explain it visually. (there might be commercials, too)

As for collateral: When a bank lends money to someone, there's a chance that the person won't pay the money back; either they can't pay it back, or they will refuse.  The risk of this happening is called "credit risk".  Often, when a bank loans someone money, they will use something called a secured loan.  A secured loan mean that the person borrowing money agrees that the bank can take something of value and sell it in case they can't pay back their loan.
For example, if you want to borrow $100,000, then the bank may agree to give it to you only if you agree to give them your house in the case you don't pay back your loan.  In other words, if you don't give the bank back all $100,000 plus interest, they will take your home, because you agreed to it.  That way, the bank has little or no risk in lending you money, because if you don't pay it back, then they just sell your stuff to get their money back.

I hope that helps answer your questions.


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Michael Taillard


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Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

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PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

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