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Deposits have two sides on the books: liability to the depositor, and cash as asset. They don't lend out the liability, they lend out the cash. That converts on

Deposits have two sides on the books: liability to the depositor, and cash as asset. They don't lend out the liability, they lend out the cash. That converts one asset, cash, into another asset, loans. I don't see this as misleading to say that they lend out deposits. Yes, in a more realistic situation, they'll be using their assets as security for borrowing short term money that they lend out long term, so it's not exactly the same money, but it's still involved in the same risks.

stephen_g 8y ago
Nope, that’s not quite it, because if somebody puts $10 in the bank, it creates $10 of assets (cash or reserves) and $10 of liabilities (deposits) so it doesn’t give the bank anything they can do anything with, apart from liquidity. The only way it can work is if writing a mortgage creates an asset (the loan), and then a new liability is made to match it (a deposit of the same amount). The security is 100% the bank’s capital, since any assets (cash/reserves) from deposits have matching liabilities. The article I linked above from the UK’s central bank is confirming that all modem banks work the way I am saying.
- wodenokoto 8y ago
  It's been a long time since I did eco101, but I thought the multiplier was what made it possible for a bank to receive a $10 deposit and loan out $100.
  - stephen_g 8y ago
    The money multiplier has always been a simplified model that doesn’t actually explain how any modern real-world banks work.
- derriz 8y ago
  When someone puts $10 in a bank, it most certainly gives the bank something they can do something with. In this case they can lend $9 out - assuming 10% reserve. On the balance sheet the bank then has $10 on the liability side - the deposit - and $9 loan and $1 reserve on the asset side. I think that you're confusing accounting with business.
  - stephen_g 8y ago
    That’s called the ‘money multiplier model’, it’s an incorrect model that doesn’t actually describe how any modern bank works. It’s basically a myth at this point. I’m not confusing anything. Believe it or not, banks actually have to follow double entry accounting rules, and follow regulations about capital adequacy. Most countries don’t even have a reserve requirement, deposits generally don’t factor into lending at all.
  - soVeryTired 8y ago
    Bizarrely, all the textbooks teach that that's how banking works, but it hasn't been true for decades. It's characteristic of economics that it makes a song and dance about summing a geometric series while completely missing the point about how the system actually works.
    - derriz 8y ago
      What exactly isn't true in my statement? - banks take in cash in from depositors (and other creditors) - banks lend out cash to borrowers - banks do not lend out all the cash that they've borrowed - they keep some in reserve Do you have the name of any retail bank which does not operate according to this model? What does their balance sheet look like? The "textbooks" reference is not relevant here - my experience is from working in retail banking operations.
      - neilwilson 8y ago
        There is a academic paper here explaining how it works. https://www.sciencedirect.com/science/article/pii/S1057521914001070 https://www.sciencedirect.com/science/article/pii/S105752191... Essentially the bank can make the loan with a zero balance sheet. If you work at the back end of a retail bank operation then you'll know that the loan department and the treasury department do not talk to each other about quantities. They talk to each other about price. Other than that the two operations operate in parallel. 'Funding' is just swapping the liabilities around in the market to try and reduce the amount the bank pays out in interest.

stephen_g 8y ago

Nope, that’s not quite it, because if somebody puts $10 in the bank, it creates $10 of assets (cash or reserves) and $10 of liabilities (deposits) so it doesn’t give the bank anything they can do anything with, apart from liquidity. The only way it can work is if writing a mortgage creates an asset (the loan), and then a new liability is made to match it (a deposit of the same amount). The security is 100% the bank’s capital, since any assets (cash/reserves) from deposits have matching liabilities. The article I linked above from the UK’s central bank is confirming that all modem banks work the way I am saying.

wodenokoto 8y ago
It's been a long time since I did eco101, but I thought the multiplier was what made it possible for a bank to receive a $10 deposit and loan out $100.
- stephen_g 8y ago
  The money multiplier has always been a simplified model that doesn’t actually explain how any modern real-world banks work.
derriz 8y ago
When someone puts $10 in a bank, it most certainly gives the bank something they can do something with. In this case they can lend $9 out - assuming 10% reserve. On the balance sheet the bank then has $10 on the liability side - the deposit - and $9 loan and $1 reserve on the asset side. I think that you're confusing accounting with business.
- stephen_g 8y ago
  That’s called the ‘money multiplier model’, it’s an incorrect model that doesn’t actually describe how any modern bank works. It’s basically a myth at this point. I’m not confusing anything. Believe it or not, banks actually have to follow double entry accounting rules, and follow regulations about capital adequacy. Most countries don’t even have a reserve requirement, deposits generally don’t factor into lending at all.
- soVeryTired 8y ago
  Bizarrely, all the textbooks teach that that's how banking works, but it hasn't been true for decades. It's characteristic of economics that it makes a song and dance about summing a geometric series while completely missing the point about how the system actually works.
  - derriz 8y ago
    What exactly isn't true in my statement? - banks take in cash in from depositors (and other creditors) - banks lend out cash to borrowers - banks do not lend out all the cash that they've borrowed - they keep some in reserve Do you have the name of any retail bank which does not operate according to this model? What does their balance sheet look like? The "textbooks" reference is not relevant here - my experience is from working in retail banking operations.
    - neilwilson 8y ago
      There is a academic paper here explaining how it works. https://www.sciencedirect.com/science/article/pii/S1057521914001070 https://www.sciencedirect.com/science/article/pii/S105752191... Essentially the bank can make the loan with a zero balance sheet. If you work at the back end of a retail bank operation then you'll know that the loan department and the treasury department do not talk to each other about quantities. They talk to each other about price. Other than that the two operations operate in parallel. 'Funding' is just swapping the liabilities around in the market to try and reduce the amount the bank pays out in interest.