I don't know if many of you know much about Banking and Finance but Banking collapses are possible in Australia.

I hope you all know that 97% of all money doesn't exist. They are just data entries on a balance Sheet.

When a bank gives you a loan, the money is created by the bank. In exchange for collateral, they are giving you a Cash Advance based on your earnings.

So you borrow $100,000 they simply credit your account with $100,000. This money in turn becomes a liability to both the borrower and the bank because the Bank has to potentially honor this credit with its Cash reserves.

These debts need to be supported. The debts need to be secured against an asset, such as your family home.

Therefore, lets say you have a home worth $500,000 and owe $450,000 on that home. You have $50,000 worth of collateral.

But let's say the Government does something silly and abolished Negative Gearing. Quite likely, property values will drop. How much is anyone guess. But let's choose a conservative number of a 20% price drop in property.

All of a sudden, your property is now worth $400,000 and you owe $450,000. Therefore, you are negative $50,000.

Banks as a result will start to panic, and as a result send you a letter that they want you to pay the $50,000 + another $40,000 (10%) to maintain your LVR of 90%. So you now have to pay them $90,000 and they give you 30 days.

Don't laugh. This kind of thing has occurred before in Australia. During the drought, it happened to hundreds of farmers in Australia.

Now most people won.t have the $90,000. No Bank will lend it you either because you need Collateral and because Banks are no longer lending money in this environment. So after about 3 months, they want to foreclose and want you off their property. The Bailiffs and Police come and give you the boot on the arse with papers signed by the Courts.

You are now homeless and destitute.

The Bank puts your house on the market for $400,000 but is exposed by $450,000. Even after 12 months when they eventually sell it for a bargain at $350,000, the liability is now $470,000 because of the addedd and compounding interest.

So they Bank gets $350,000.

Net Loss = $120,000 to the bank. Multiply this by thousands of houses, the Bank becomes stressed and is eating its Cash Reserves of 3%. This results in a Bank Run. The Bank then needs to close and introduce Capital restrictions so it does not go Bankrupt.

It's a slippery slope from there.

Now obviously it is a little more complicated than this. But I have tried to keep it as simplistic as possible so people can understand.

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Edited by Aikhme: 18/5/2016 01:37:19 AM