Why do banks give loans instead of buying assets themselves?

Question

There was asked a similar question why don't banks invest money in mutual funds or shares instead of giving personal loans

It was about buying fonds and shares. Those are derivatives.

Here is an example. 2019 year in central Europe. A flat costs 150 000 USD. If a person buys it, the person can rent it for 700 USD per month = 8 400 USD per year, which can be considered as 5.6 % per year (assuming that economical situation is more or less stable). Also down-payment can be 20 %. In 2019 interests rates are low - 3 % per year.

What does it mean? A person needs to have 30 000 USD, and take a loan 120 000 USD. The person will pay 3 % from 120 000 USD per year, and receive 5.6 % from 120 000 USD.

As we see, it is beneficial for a person (who has 30 000 USD) to make such investment.

The bank which gives the person 120 000 USD also feels good because it will get payments. Let's assume that the person is solvent and has his primary place of residence (another flat where he lives). Why not the bank buy a flat and rent it out to make 5.6 % per year instead of giving it out to people at the rate of 3 %.

Also I learned when a company buys another company, the bank can lend most of money to make the deal.

Answer 1

Banks are designed to be good at evaluating loan applications. They aren't designed to be good at running businesses. And if banks decided that they wanted to get into the apartment rental business, the government would prevent it.

The person renting out the flat has to advertise it to find potential tenants. They have to show the flat and evaluate potential tenants. They have to deal with repairs and maintenance. They have to deal with tenants that fall behind on the rent, that stop paying rent and need to be evicted, and with tenants that damage the flat. They have to deal with months where the flat is empty. Those things realistically mean that the landlord is making less than the 5.6% you're quoting. But it also requires a host of skills that the bank doesn't have. Of course, the bank could outsource most of these tasks and just supervise some property management companies but that's further cutting into the potential profits and that still requires a bunch of managers that the bank doesn't have.

Of course, banks do far more than just real estate loans. They're going to give loans to the person that wants to open a car dealership, to the doctor that wants to open a practice, and to the businessman that wants to open another McDonalds franchise. In theory, the bank could be in the business of managing a car lot and a medical practice and a fast food restaurant in addition to renting out apartments. But it is terribly unlikely that it would be good at all these things.

Practically, if a bank decided to get into one or all of these businesses, they would almost certainly encounter legal troubles. If the government is going to insure bank deposits (which is close to universal), they're going to want to ensure that banks remain solvent. If banks started running a bunch of businesses rather than just making loans, there would be a large risk that some banks would run their businesses badly and lose those deposits meaning that the government would have to bail them out. That's very different from a rental company that can go bankrupt if it mismanages its business and only lose the money that investors have risked. It also puts the bank at an unfair competitive position-- they're running the business with money the government guarantees while a regular apartment rental company is running the business with money that the investors are risking. I can't say that every country already has laws that prevent banks from operating businesses like this. If a bank decided to try to get into a business like this, though, and a country didn't have an existing law, it would almost assuredly pass such a law.

Answer 2

The business of banks is banking

Banks are good at it.

The business of property managers is managing property. Banks are lousy at it so they don’t do it.

Similarly banks don’t understand the business of mining, running airlines, operating gyms or managing professional sports teams. So they don’t do that either.

The skills and talents that go into running a profitable bank are not necessarily transferable to other businesses.

Answer 3

It's a matter of risk. If the bank doesn't receive its expected return on the loan (the borrower defaults), the bank can foreclose on the flat to recover its investment (even if the flat declines by up to 20%, or even more if the borrower has been paying for a while).

Someone who invests in the flat itself does not have any recourse or collateral to seize, if the real estate market goes south at some point and the expected rent does not materialize (well, the only recourse is the aforementioned defaulting on loans if things get really bad).

Generally, the market will price things so that the riskier investment has a higher expected return. The bank is choosing to get a conservative, safer return on its capital by enabling others in need of capital to take risks in search of high returns.