8 ms·

That's a false dichotomy. From a bank's perspective savings accounts are money they borrow, while mortgages and corporate loans are money they lend out. A ban

That's a false dichotomy. From a bank's perspective savings accounts are money they borrow, while mortgages and corporate loans are money they lend out. A bank can make money on a savings account via fees and the like, and having a large base of savings can provide massive political cover, but in the idealized system bank accounts were always a way of raising money and so a cost center not a profit center. The interest rate being low is a good thing from their perspective it means the cost of acquiring working capital is lower than when they have to pay out more.

ThomPete 11y ago
In theory you are right. In reality thats just not how they make their money. Amongst other reasons because the governments have deemed them too important for normal people and so they in effect subsidize them and fund them through amongst other things Fractional Reserve Banking. The big banks are considered too big to fail and so they more less have a get out of jail card to gear their risk. The money they can make from personal savings accounts are absurdly insignificant compared to these other areas.
- kbenson 11y ago
  > governments have deemed them too important for normal people and so they in effect subsidize them and fund them through amongst other things Fractional Reserve Banking. Isn't Fractional Reserve Banking where banks are required to keep a portion of the deposits available as a reserve in case their investments go bad? How is that governments subsidizing them? Without fractional reserve, banks would be free to lend out as much of your deposited money as they thought they could get away with. Edit: Ah, from reading some more it appears it's different in a few very important details, even if the structure is the same. The Banks are only allowed to lend a certain multiple of the cash reserves they have on hand, not a certain fraction. That is, reserve deposits are a fraction of lending, not vice-versa. I'm still not sure how that's governments subsidizing them though. Without the restriction on lending, I could see banks getting a little wild in the boom economies (which happened in the mid to late 2000s).
  - pdonis 11y ago
    > reserve deposits are a fraction of lending, not vice-versa. I'm still not sure how that's governments subsidizing them though. Where does the rest of the money that's lent out come from? If you deposit $100 and the bank can, based on that deposit, lend out $1000 (assuming a 10% reserve requirement, which is fairly typical), where does the other $900 come from? [Edit: this is somewhat misstated, see subthread under jonas21's response.]
    - bradleyjg 11y ago
      There is a subsidy, but you are putting it in the wrong place in the chain of events. It is the government backstop that is the subsidy, not legalizing the ability to make promises. If you had a banking system with no government backstop you could still have fractional reserve banking but all the players in the system would bear the counterparty risks. The bank could claim you $500 in it but in reality you'd have a contingent interest in the assets of the bank. Money markets worked this way until the USG decided to reward the gamblers by treating them identically to the more prudent.
      - pdonis 11y ago
        > It is the government backstop that is the subsidy, not legalizing the ability to make promises. A bank lending out more money than it actually has on deposit is not just "making promises"; it's "making promises they know they can't keep". Yes, banks did get away with that before the government got into the business of printing money, but it was riskier for them, which is why they prefer to have the government do it--in other words, instead of taking on the risk themselves of printing money not backed by deposits, they prefer to have the government print the money and give it to them to lend. See my response to sbov upthread. The "backstop" is certainly a factor, of course--it's what prevents ordinary bank runs from happening. But, as I noted in my response to sbov upthread, that certainly doesn't eliminate financial panics; it just exchanges one failure mode for another (arguably worse) one. * If you had a banking system with no government backstop you could still have fractional reserve banking but all the players in the system would bear the counterparty risks. The bank could claim you $500 in it but in reality you'd have a contingent interest in the assets of the bank.* Well, I suppose this is true in a technical sense, but the fact is that practically nobody, in the days when banks did this (i.e., before governments started printing the money), understood that this was what was happening. Again, see my response to sbov upthread. > Money markets worked this way until the USG decided to reward the gamblers by treating them identically to the more prudent. I certainly agree that USG's actions have not helped; but "banking" is a much broader category than "money markets", and fractional reserve banking is centuries old. And, as I noted above, practically nobody who deposited money in a bank or borrowed money from one realized what was actually going on; they thought that the bank being "reputable" meant it only lent money it actually had. When people did realize what was actually going on, they started a bank run.
- pas 11y ago
  Basel III is the new risk limit framework. Banks have become critical infrastructure. They are not subsidized nor funded by the Federal Reserve System (the Fed) in any way. The (fractional) reserve requirement is not really relevant, because any bank can just borrow cash (discount window policy), put it into their reserve account - and presto, - lend out more. So if they want to lend out X, they have to borrow X+(0.05 * X). But the reserve requirement and the discount window are not the main monetary policy tools, because it's usually not cost effective to borrow from the Fed. However, it's even easier than that. Not all liabilities are (fractionally) backed by reserves, so if a bank can shuffle the money from one type to an other, it can lend out more of that. ( https://www.newyorkfed.org/medialibrary/media/research/epr/02v08n1/0205bennpdf.pdf https://www.newyorkfed.org/medialibrary/media/research/epr/0... ) https://www.richmondfed.org/~/media/richmondfedorg/publications/research/region_focus/2011/q1/pdf/federal_reserve.pdf https://www.richmondfed.org/~/media/richmondfedorg/publicati... - graph on the 3rd page is worth looking at All in all, banks are risk constrained. The growth rate of the money supply is basically a measure of how lenders think the economy will grow (how much new wealth will be created), since debt that gets paid back shrinks the money supply (assuming constant velocity of money, if the velocity increases, less money is sufficient to sustain the debt cycle). Personal savings accounts are important, because they get access to cheap capital, so they don't have to raise it elsewhere in order to lend it out. Effectively, banks are a strange, misaligned, mismanaged and misregulated amalgamation of a completely automatic thing [money management, transactions, deposits, ATMs] and (investment) risk assessment. Those should be separated, or the interfaces made clear. (Such as you get a better credit rating if you grant access to your account event history/stream. And we should forget about using savings deposits and other accounts as sources for lending.)

ThomPete 11y ago

In theory you are right. In reality thats just not how they make their money. Amongst other reasons because the governments have deemed them too important for normal people and so they in effect subsidize them and fund them through amongst other things Fractional Reserve Banking. The big banks are considered too big to fail and so they more less have a get out of jail card to gear their risk. The money they can make from personal savings accounts are absurdly insignificant compared to these other areas.

kbenson 11y ago
> governments have deemed them too important for normal people and so they in effect subsidize them and fund them through amongst other things Fractional Reserve Banking. Isn't Fractional Reserve Banking where banks are required to keep a portion of the deposits available as a reserve in case their investments go bad? How is that governments subsidizing them? Without fractional reserve, banks would be free to lend out as much of your deposited money as they thought they could get away with. Edit: Ah, from reading some more it appears it's different in a few very important details, even if the structure is the same. The Banks are only allowed to lend a certain multiple of the cash reserves they have on hand, not a certain fraction. That is, reserve deposits are a fraction of lending, not vice-versa. I'm still not sure how that's governments subsidizing them though. Without the restriction on lending, I could see banks getting a little wild in the boom economies (which happened in the mid to late 2000s).
- pdonis 11y ago
  > reserve deposits are a fraction of lending, not vice-versa. I'm still not sure how that's governments subsidizing them though. Where does the rest of the money that's lent out come from? If you deposit $100 and the bank can, based on that deposit, lend out $1000 (assuming a 10% reserve requirement, which is fairly typical), where does the other $900 come from? [Edit: this is somewhat misstated, see subthread under jonas21's response.]
  - bradleyjg 11y ago
    There is a subsidy, but you are putting it in the wrong place in the chain of events. It is the government backstop that is the subsidy, not legalizing the ability to make promises. If you had a banking system with no government backstop you could still have fractional reserve banking but all the players in the system would bear the counterparty risks. The bank could claim you $500 in it but in reality you'd have a contingent interest in the assets of the bank. Money markets worked this way until the USG decided to reward the gamblers by treating them identically to the more prudent.
    - pdonis 11y ago
      > It is the government backstop that is the subsidy, not legalizing the ability to make promises. A bank lending out more money than it actually has on deposit is not just "making promises"; it's "making promises they know they can't keep". Yes, banks did get away with that before the government got into the business of printing money, but it was riskier for them, which is why they prefer to have the government do it--in other words, instead of taking on the risk themselves of printing money not backed by deposits, they prefer to have the government print the money and give it to them to lend. See my response to sbov upthread. The "backstop" is certainly a factor, of course--it's what prevents ordinary bank runs from happening. But, as I noted in my response to sbov upthread, that certainly doesn't eliminate financial panics; it just exchanges one failure mode for another (arguably worse) one. * If you had a banking system with no government backstop you could still have fractional reserve banking but all the players in the system would bear the counterparty risks. The bank could claim you $500 in it but in reality you'd have a contingent interest in the assets of the bank.* Well, I suppose this is true in a technical sense, but the fact is that practically nobody, in the days when banks did this (i.e., before governments started printing the money), understood that this was what was happening. Again, see my response to sbov upthread. > Money markets worked this way until the USG decided to reward the gamblers by treating them identically to the more prudent. I certainly agree that USG's actions have not helped; but "banking" is a much broader category than "money markets", and fractional reserve banking is centuries old. And, as I noted above, practically nobody who deposited money in a bank or borrowed money from one realized what was actually going on; they thought that the bank being "reputable" meant it only lent money it actually had. When people did realize what was actually going on, they started a bank run.
pas 11y ago
Basel III is the new risk limit framework. Banks have become critical infrastructure. They are not subsidized nor funded by the Federal Reserve System (the Fed) in any way. The (fractional) reserve requirement is not really relevant, because any bank can just borrow cash (discount window policy), put it into their reserve account - and presto, - lend out more. So if they want to lend out X, they have to borrow X+(0.05 * X). But the reserve requirement and the discount window are not the main monetary policy tools, because it's usually not cost effective to borrow from the Fed. However, it's even easier than that. Not all liabilities are (fractionally) backed by reserves, so if a bank can shuffle the money from one type to an other, it can lend out more of that. ( https://www.newyorkfed.org/medialibrary/media/research/epr/02v08n1/0205bennpdf.pdf https://www.newyorkfed.org/medialibrary/media/research/epr/0... ) https://www.richmondfed.org/~/media/richmondfedorg/publications/research/region_focus/2011/q1/pdf/federal_reserve.pdf https://www.richmondfed.org/~/media/richmondfedorg/publicati... - graph on the 3rd page is worth looking at All in all, banks are risk constrained. The growth rate of the money supply is basically a measure of how lenders think the economy will grow (how much new wealth will be created), since debt that gets paid back shrinks the money supply (assuming constant velocity of money, if the velocity increases, less money is sufficient to sustain the debt cycle). Personal savings accounts are important, because they get access to cheap capital, so they don't have to raise it elsewhere in order to lend it out. Effectively, banks are a strange, misaligned, mismanaged and misregulated amalgamation of a completely automatic thing [money management, transactions, deposits, ATMs] and (investment) risk assessment. Those should be separated, or the interfaces made clear. (Such as you get a better credit rating if you grant access to your account event history/stream. And we should forget about using savings deposits and other accounts as sources for lending.)