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This seems to me very analogous to preventing a run on banks. Traditionally retail banks would invest their depositors' savings in real estate by financing mort

This seems to me very analogous to preventing a run on banks. Traditionally retail banks would invest their depositors' savings in real estate by financing mortgages. Indeed - in England many banks are still called "building societies". Depositors are in principle able to get their money back at any time, but this is possible only because a small fraction will want to at any one time. But when there's a "run on the banks" in a financial crisis, banks can't satisfy the withdrawal demands of every depositor simultaneously - except through distressed sales that only exacerbate the problem. Governments sometimes step in to call a "bank holiday" until the panic subsides. The situation, down to the main class of assets held (real estate) and the liquidity promised to creditors, seems to be pretty much exactly the same as at the retail level. That being the case, this seems to be the prudent move.

eric_the_read 10y ago
My understanding is that the British building society is more akin to a credit union, being owned by its members, than a bank. Is that not the case?
- tvladeck 10y ago
  I was more speaking to the origin of the term (as in, a society of people pooling their money to build buildings); not how it's used today. You may very well be correct and that would make sense.
  - alblue 10y ago
    Many building societies became banks over the last couple of decades. However, some are still mutually owned, such as the Narionwide and the Co-op.
gozur88 10y ago
>This seems to me very analogous to preventing a run on banks. Traditionally retail banks would invest their depositors' savings in real estate by financing mortgages. Indeed - in England many banks are still called "building societies". That's not really how banking works in a fractional reserve system. The money banks lend to borrowers is created as part of the loan transaction, and in theory the bank retains enough money to pay off all depositors in the event of a bank run.
- eru 10y ago
  What do you mean by money? (Honestly.) I don't think any bank carries lots of cash around these days to pay their depositors. So in case of a run, they have to give them some other kind of money. Do you mean that they'll always have enough balance with the central bank? Why do banks care about having deposits?
  - gozur88 10y ago
    >What do you mean by money? (Honestly.) By money I don't mean actual folding paper currency. These are all just numbers in computers - the central bank buys and sells currency as retail banks need it, but since that would take time most likely during a run they would give you a cashier's check which you could deposit somewhere else. The amount of actual cash a bank branch has at a branch at any given time is just enough to handle their need for cash. Your typical US suburban retail bank starts the day with something like $20k in the vault. If I wanted to withdraw more than a few thousand bucks in cash I would have to give my bank advance notice. There isn't actually a piece of currency somewhere for every outstanding dollar (or pound or euro or yen or whatever). If I'm reading this chart correctly there's something like 5 US dollars circulating in the economy for every dollar in currency. http://www.tradingeconomics.com/united-states/money-supply-m2 http://www.tradingeconomics.com/united-states/money-supply-m... The amount of outstanding currency is mostly irrelevant. If I deposit $100k at a bank using an electronic check the bank could turn around and buy $100k in currency from the Fed, but for the most part there isn't any reason to and all they do is change my balance in the computer. >Why do banks care about having deposits? Because in theory the amount of money they have in reserve dictates how much they can create in new loans. For example, if the reserve ratio is 9:1 and you deposit $10k, the bank can only loan out $9k on the basis of your deposit. If too many people withdraw money that quarter the bank has to increase its reserves to match the ratio of outstanding loans by attracting more deposits, selling assets (like loans), or borrowing from other financial institutions (including the central bank). The reserve ratio is set by the government, and it's one of those knobs central bankers can turn to affect the economy -when they want to stimulate the economy they can increase the reserve ratio, which allows banks to make more loans. If they want to slow things down a bit they can decrease the ratio, which makes it harder for banks to make loans. This video, while a bit on the melodramatic side, actually explains basic banking reasonably well: https://www.youtube.com/watch?v=jqvKjsIxT_8 https://www.youtube.com/watch?v=jqvKjsIxT_8

eric_the_read 10y ago

My understanding is that the British building society is more akin to a credit union, being owned by its members, than a bank. Is that not the case?

tvladeck 10y ago
I was more speaking to the origin of the term (as in, a society of people pooling their money to build buildings); not how it's used today. You may very well be correct and that would make sense.
- alblue 10y ago
  Many building societies became banks over the last couple of decades. However, some are still mutually owned, such as the Narionwide and the Co-op.

gozur88 10y ago

>This seems to me very analogous to preventing a run on banks. Traditionally retail banks would invest their depositors' savings in real estate by financing mortgages. Indeed - in England many banks are still called "building societies". That's not really how banking works in a fractional reserve system. The money banks lend to borrowers is created as part of the loan transaction, and in theory the bank retains enough money to pay off all depositors in the event of a bank run.

eru 10y ago
What do you mean by money? (Honestly.) I don't think any bank carries lots of cash around these days to pay their depositors. So in case of a run, they have to give them some other kind of money. Do you mean that they'll always have enough balance with the central bank? Why do banks care about having deposits?
- gozur88 10y ago
  >What do you mean by money? (Honestly.) By money I don't mean actual folding paper currency. These are all just numbers in computers - the central bank buys and sells currency as retail banks need it, but since that would take time most likely during a run they would give you a cashier's check which you could deposit somewhere else. The amount of actual cash a bank branch has at a branch at any given time is just enough to handle their need for cash. Your typical US suburban retail bank starts the day with something like $20k in the vault. If I wanted to withdraw more than a few thousand bucks in cash I would have to give my bank advance notice. There isn't actually a piece of currency somewhere for every outstanding dollar (or pound or euro or yen or whatever). If I'm reading this chart correctly there's something like 5 US dollars circulating in the economy for every dollar in currency. http://www.tradingeconomics.com/united-states/money-supply-m2 http://www.tradingeconomics.com/united-states/money-supply-m... The amount of outstanding currency is mostly irrelevant. If I deposit $100k at a bank using an electronic check the bank could turn around and buy $100k in currency from the Fed, but for the most part there isn't any reason to and all they do is change my balance in the computer. >Why do banks care about having deposits? Because in theory the amount of money they have in reserve dictates how much they can create in new loans. For example, if the reserve ratio is 9:1 and you deposit $10k, the bank can only loan out $9k on the basis of your deposit. If too many people withdraw money that quarter the bank has to increase its reserves to match the ratio of outstanding loans by attracting more deposits, selling assets (like loans), or borrowing from other financial institutions (including the central bank). The reserve ratio is set by the government, and it's one of those knobs central bankers can turn to affect the economy -when they want to stimulate the economy they can increase the reserve ratio, which allows banks to make more loans. If they want to slow things down a bit they can decrease the ratio, which makes it harder for banks to make loans. This video, while a bit on the melodramatic side, actually explains basic banking reasonably well: https://www.youtube.com/watch?v=jqvKjsIxT_8 https://www.youtube.com/watch?v=jqvKjsIxT_8