4. Here's how it's meant to work Low interest rate X Higher interest rate Y Y – X = Gross Profit (ie – before other costs like staff)
5. Let's look at incentives... Wants to lend to a stable bank, but actually the Government will pick up most of the risk of bank collapse Only wants to lend to buyers who will make payments each month. Wants to get money back if they have to repossess
6. ... and risks A few customers might default, but negotiation, or repossession kept things working (plus, the profit was enough anyway)
7.
8. Timing... Depositors want to be able to get at their cash at any time Want to repay their mortgage over a long period (25 years)