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>> "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
by 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 agoWhat'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 agoBut the banks are owed all the money anyways because they own a matching loan for the same amount.
- lucio 8y agoThe banks are owed all the money plus interest
- Dylan16807 8y agoRight. 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 agoYes, 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 agoYes, 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 agoYou 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 agoYes you can. How much they can lend is determined by their reserves. How much they will lend is determined by other forces.