Banks

Banks play a central role in the functioning of Tear's global economy. Because Tear is mostly a world of city states, and not a world of large colonial nation states, the largest banks are wealthier than even the largest and most powerful states, and even smaller banks can gain enormous leverage over a state if the government does not manage its finances carefully.

The major banks of Tear engage in three main activities: the management of accounts, the secure transport of bulk currency, and the issuance of loans.

Accounts

Account management is the activity of accepting money from an individual, organization or state, securing it, and making it accessible in exchange for a small fee. The primary advantages of having an account with a bank are in security, accessibility, and access to other services, such as ability to take loans and to access alternative financial instruments.

Normally, in order to open an account with a bank, one must be a resident or citizen in a state where the bank maintains an office. In some cases, a tenant might be permitted to open an account, though this will normally need to be supported by a citizen, resident or faction.

Banks attract people to open accounts with them by offering security and easier access to money in exchange for fees. They also pay interest to account holders based on the amount held in their account - the more someone holds on deposit with a bank, the larger the bank's reserve; this means less money to move around and more money to loan out.

Account Fees

Banks typically charge a 1% transaction fee for any withdrawal. This means if you take $100 silver out of your account, the bank keeps $1. This rate is doubled to 2% if you make a withdrawal from a foreign office - from any office of the bank outside of the state in which you opened your account. For very high amounts, usually over $20,000, the rates go down, but never to zero. Individuals, factions or states that regularly need to withdraw large amounts will generally negotiate a special contract with the bank giving the account holder the best rates in exchange for higher predictability for the bank so they can better balance their reserves (thus needing to move less money, less often.)

Interest

Banks are unusual in that they pay their customers to do business with them. Banks pay interest to every account holder as a lump sum added to the balance of their account on the last day of every month. Total interest is calculated on the last day of the year by taking 1% of the lowest balance of the account over the entire previous calendar year. This amount is then divided by ten and paid out in ten monthly installments. This means that you will receive no interest on your account in the first year you open it, and (unless you opened the account on the very first day of the year) you will also receive no interest in the second year, but in the third year, you will start to receive interest based on whatever the lowest balance was in your account during the second year.

Example interest payment:

A merchant opens an account on 15 Blossom, 1421, by depositing $5000
On 40 Fire, 1421 the bank checks the lowest balance in the merchant's account between 1 Ember 1421 and 40 Fire 1421.
The lowest balance was necessarily 0 because prior to 15 Blossom the account did not exist.
Over the course of 1422, the merchant makes frequent deposits and withdrawals from their account, and the balance fluctuates.
On 40 Fire, 1422 the bank checks the lowest balance in the merchant's account between 1 Ember 1422 and 40 Fire 1422.
The lowest balance was $4800, on 20 Fig, 1422.
The bank determines that the merchant will be paid $48 in interest for the funds held in the account during the year 1422.
On 40 Ember, 1423, and on the last day of every month for the rest of the year, the bank adds $4.8 to the balance of the merchant's account.
On 40 Fire, 1423 the bank checks the lowest balance in the merchant's account between 1 Ember 1423 and 40 Fire 1423, and the process repeats.

Securing and Transporting Currency

Transporting currency is dangerous and risky. At the same time merchants, traders, armies, and anyone who travels will need to have access to money when they arrive at their destination. While banks can and do transport currency, the entire purpose of the business is to minimize the amount of currency that ever needs to be relocated. The less the physical currency needs to be move, the more profitable the business of banking is.

Supported by large reserves of currency, banks can accept currency deposits in one location, and update the account information faster than most travellers can reach a new destination. Provided there is enough currency in the reserve at the destination a traveller can then withdraw their money at the destination without the actual physical currency travelling there at all. Ideally, other travellers coming the other direction will do the same and over time everything will balance out, with no need to transport physical currency at all. At a small scale this business cannot work, but with regional reserves holding tens or even hundreds of millions of silver the business becomes highly profitable.

Loans

Another important business that banks engage in is the issuance of loans. While banks are primarily interested in making loans to large, established organizations such as businesses, factions and governments, they will also offer individual loans under certain circumstances.

Generally, all personal or small business loans will need to be collateralized. This means a contract must be signed with the bank granting them the right to seize an asset equal to the value of the loan if regular loan payments are not made. In many cases, the collateralizing asset is the thing being purchased with the loan.

Interest rates on loans from banks on Tear are simplified so as to avoid complex compound interest calculations. A typical loan usually requires the borrower to pay 1% of the total value of the loan every month in interest plus 10% of the total value of the loan every year against the principal (remember: there are 10 months in a year on Tear). The maximum term of a loan is usually ten years, though in this simplified system there are no penalties for paying off loans in less time. The maximum amount of a loan is usually $10 raised to the power of the borrower's Social Status.

You must have an account with a bank in order to receive a loan (which means in most cases your must be a citizen or resident).

Example loan:

A squire seeks a loan to purchase finely crafted armour.
At SS4, the largest loan the squire can get is for 10^4 = $10,000.
The squire does not have anything worth $10k to offer as collateral, but the armour itself will serve as the collateral.
The squire is granted a loan for $10,000.
The squire must pay $100 in interest every month. If they fail to meet this payment, the armour will be seized and the loan cancelled.
The squire must also pay $1000 against the principal of the loan every year. If they fail to meet this payment, the armour will be seized and the loan cancelled.
If the squire slays a dragon and claims its horde within the first month after receiving the loan and buying the armour, they can repay the loan immediately for $10,000 - a month has no passed, so no interest is due.
If the squire makes their minimum monthly payment for interest and their minimum annual payment against the principal, they will pay $100 x 10/year in interest, and $1000/year against the principal for 10 years. The armour will end up costing $20,000.
If the squire makes their interest payment of $100 every month, and pays $2500 each year against the principal for 4 years, the armour will end up costing them $14,000.
Whenever the squire pays off the entire principal, the loan contract is fulfilled, and the armour can no longer be seized by the bank.