A bank is a matchmaker. It takes money from people who don't need it yet and lends it to people who do, and your credit rating is how it decides what to charge you for the introduction.
Learning objectives. After this week you can (1) explain what a financial intermediary does; (2) compute a leverage ratio and the interest on a balance; and (3) explain how leverage makes the business cycle worse.
Remember this: interest costs the same on a bad day as on a good one. Leverage makes good seasons better and bad seasons worse.
1) What a financial system is for
A financial intermediary (a bank) gathers savers' deposits and lends them to borrowers. It earns the spread: pay savers 2%, charge borrowers 7%, and the spread is 5 points. That spread pays for its real job, screening risk. Riskier borrowers pay higher rates because some of them will not repay, and the rate has to cover those expected losses.
2) Your resort's credit file
Your Daily Report shows what a loan officer looks at: Loan balance, Bank cash, Cumulative net, and your Credit rating. A lender asks two questions: how much do you owe compared with the cash you hold, and are you making money?
Leverage Ratio = Loan Balance ÷ Bank Cash
Team Alpine owes $25,000 and holds $100,000: ratio 0.25. Team Cornice owes $120,000 and holds $110,000: ratio about 1.09. Cornice isn't broke, but it owes more than it holds, and lenders charge for that fragility. You also cannot repay more than you owe, or more cash than you hold.
3) The price of a downgrade
Daily interest is balance × annual rate ÷ 365. On $150,000, a rate rise from 6% to 10% takes daily interest from $24.66 to $41.10: about $16 more every day, or 0.04 × 150,000 = $6,000 a year, for the identical loan. The money didn't change; the risk assessment did.
4) Leverage: the cycle's amplifier
Leverage is running on borrowed money. In a boom, borrowing $100,000 for a lift lets you profit on capacity you didn't pay cash for. In a bust, revenue falls, cash drains, the ratio climbs, the rating can slip, and borrowing gets dearer exactly when cash is shortest. Falling income tightening credit, which cuts spending further, is the financial accelerator. It is why recessions with banking trouble run deepest.
Quick self-check
(a) Loan $60,000, bank $120,000. Leverage ratio? (b) $36,500 at 10%. Daily interest? (c) A bank pays savers 3% and charges borrowers 8%. Its spread? (Answers: 0.5; 36,500 × 0.10 ÷ 365 = $10.00; 5 points.)
Common mistakes
- Treating unused borrowing room as free money. It is your cushion for a bad stretch.
- Watching the loan but not the cash. The ratio has two sides.
- Forgetting interest is a fixed cost. It accrues whether or not the lifts spin.
This week in the arena
From your latest report, compute your leverage ratio and check your credit rating. Then find a team with a different rating: what is different about their ratio, or their cumulative net?