5 ms·

> but if the loan is profitable the bank can always borrow the reserves at a lower rate on the interbank market. They're still loaning out deposits, though. T

by darawk 8y ago

> but if the loan is profitable the bank can always borrow the reserves at a lower rate on the interbank market. They're still loaning out deposits, though. They're just borrowing someone else's deposits to do it.

avn2109 8y ago
>> "They're still loaning out deposits, though." I'm not the GP here but his point is that actually the bank in general does not loan out deposits[0]. Instead, the bank creates money at the moment a counterparty agrees to borrow it (in countries with a certain type of financial system, aka most countries today, with some interesting exceptions). The name for an institution that loans out deposits is "credit union," but most people think that's what a bank does. Most people are very surprised by this claim that ordinary banks create money, and deny it when you tell them. But really there's no coverup of this fact, it's written e.g. literally on the websites of most central banks such as e.g. [1], wherein the critical passage (in boldface on the first page) is: "Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money." This seems unjust to most people, since in our daily experience, money is not a thing which is very commonly created. I take no position on that alleged injustice here, and instead leave it as an exercise for the reader to reason out the consequences of a private-bankers-printing-money themed financial system (of which consequences there are many) and to ponder the identities of the people doing most of the printing. [0] Sometimes it actually does turn out that a bank loans out a deposit, as the GP mentions, but this is by construction a small fraction of bank business. [1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- kzrdude 8y ago
  What's the exception? And is there a special license for being allowed to create money?
  - Dylan16807 8y ago
    > And is there a special license for being allowed to create money? The difficulty is not in letting people make accounts and setting balances on those accounts. The difficulty is getting everyone to not immediately withdraw the entire balance as cash. There are regulatory hurdles, but they're very much secondary.
    - deleted 8y ago
      [deleted]
    - testvox 8y ago
      But the banks are owed all the money anyways because they own a matching loan for the same amount.
      - lucio 8y ago
        The banks are owed all the money plus interest
      - Dylan16807 8y ago
        Right. And you can make a balance+loan agreement with someone if you want. The issue is trying to hang onto the money while also loaning it out. If everyone immediately took loans in cash form and they never got deposited back to banks, then banks wouldn't be able to create money via loans either.
  - User23 8y ago
    Yes, a banking license. They are hard to get [1] [1]https://www.dfs.ny.gov/banking/iasc.htm https://www.dfs.ny.gov/banking/iasc.htm
- darawk 8y ago
  Yes, my point is they're not untethered to the deposits. The money is synthesized via the leverage (reserve) ratio. A bank with $100 in deposits gets to lend out $1000. But they don't get to lend out any arbitrary figure that they choose.
  - stephen_g 8y ago
    You can’t actually know how much a bank can lend from the amount of reserves or the amount of deposits they have - how much they can lend is actually based on the amount of capital.
    - darawk 8y ago
      Yes you can. How much they can lend is determined by their reserves. How much they will lend is determined by other forces.
cryptonector 8y ago
The way banks create money is as follows: you lend a bank X, the bank then lends 9x X and calls the X you gave them "reserves". The reserves don't get lent. If you want to know where the 9x X comes from, the answer is: thin air. Banks count on (depend on!) there not being a run on the banks, and they count on borrowers to not default at a higher-than-expected rate. As long that is the case, the banks thrive, the borrowers thrive, and the savers thrive. If however, the economy tanks hard enough, then too many borrowers go broke, savers get scared and ask for their money back, and the banks go bust.
- stephen_g 8y ago
  That’s called the ‘money multiplier model’, and it’s a popular but incorrect model. Banks lever capital (paid up shares and retained profits) to create money for loans, not deposits. Existing deposits are funding for interbank settlements (for transfers). The amount of reserves the bank has doesn’t actually affect lending one bit - it does affect liquidity but most countries don’t even have reserve requirements because banks can just borrow reserves from other banks or the lender of last resort (central bank) if they need to. The main bank regulation now is capital adequacy ratios.

by darawk 8y ago

avn2109 8y ago

>> "They're still loaning out deposits, though." I'm not the GP here but his point is that actually the bank in general does not loan out deposits[0]. Instead, the bank creates money at the moment a counterparty agrees to borrow it (in countries with a certain type of financial system, aka most countries today, with some interesting exceptions). The name for an institution that loans out deposits is "credit union," but most people think that's what a bank does. Most people are very surprised by this claim that ordinary banks create money, and deny it when you tell them. But really there's no coverup of this fact, it's written e.g. literally on the websites of most central banks such as e.g. [1], wherein the critical passage (in boldface on the first page) is: "Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money." This seems unjust to most people, since in our daily experience, money is not a thing which is very commonly created. I take no position on that alleged injustice here, and instead leave it as an exercise for the reader to reason out the consequences of a private-bankers-printing-money themed financial system (of which consequences there are many) and to ponder the identities of the people doing most of the printing. [0] Sometimes it actually does turn out that a bank loans out a deposit, as the GP mentions, but this is by construction a small fraction of bank business. [1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

kzrdude 8y ago
What's the exception? And is there a special license for being allowed to create money?
- Dylan16807 8y ago
  > And is there a special license for being allowed to create money? The difficulty is not in letting people make accounts and setting balances on those accounts. The difficulty is getting everyone to not immediately withdraw the entire balance as cash. There are regulatory hurdles, but they're very much secondary.
  - deleted 8y ago
    [deleted]
  - testvox 8y ago
    But the banks are owed all the money anyways because they own a matching loan for the same amount.
    - lucio 8y ago
      The banks are owed all the money plus interest
    - Dylan16807 8y ago
      Right. And you can make a balance+loan agreement with someone if you want. The issue is trying to hang onto the money while also loaning it out. If everyone immediately took loans in cash form and they never got deposited back to banks, then banks wouldn't be able to create money via loans either.
- User23 8y ago
  Yes, a banking license. They are hard to get [1] [1]https://www.dfs.ny.gov/banking/iasc.htm https://www.dfs.ny.gov/banking/iasc.htm
darawk 8y ago
Yes, my point is they're not untethered to the deposits. The money is synthesized via the leverage (reserve) ratio. A bank with $100 in deposits gets to lend out $1000. But they don't get to lend out any arbitrary figure that they choose.
- stephen_g 8y ago
  You can’t actually know how much a bank can lend from the amount of reserves or the amount of deposits they have - how much they can lend is actually based on the amount of capital.
  - darawk 8y ago
    Yes you can. How much they can lend is determined by their reserves. How much they will lend is determined by other forces.

cryptonector 8y ago

The way banks create money is as follows: you lend a bank X, the bank then lends 9x X and calls the X you gave them "reserves". The reserves don't get lent. If you want to know where the 9x X comes from, the answer is: thin air. Banks count on (depend on!) there not being a run on the banks, and they count on borrowers to not default at a higher-than-expected rate. As long that is the case, the banks thrive, the borrowers thrive, and the savers thrive. If however, the economy tanks hard enough, then too many borrowers go broke, savers get scared and ask for their money back, and the banks go bust.

stephen_g 8y ago
That’s called the ‘money multiplier model’, and it’s a popular but incorrect model. Banks lever capital (paid up shares and retained profits) to create money for loans, not deposits. Existing deposits are funding for interbank settlements (for transfers). The amount of reserves the bank has doesn’t actually affect lending one bit - it does affect liquidity but most countries don’t even have reserve requirements because banks can just borrow reserves from other banks or the lender of last resort (central bank) if they need to. The main bank regulation now is capital adequacy ratios.