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When lloyds creates another loan it automatically creates the matching deposit. You get both a mortgage debt and a credit asset when you take out a loan. You th

When lloyds creates another loan it automatically creates the matching deposit. You get both a mortgage debt and a credit asset when you take out a loan. You then transfer that credit asset to somebody else to pay them. But it is the loan that creates the credit asset in the first place. Deposits have no quantity control function on lending. It's only ever a pricing issue.

cm2187 8y ago
When you lend to someone, he is free to transfer the money immediatly to whomever, who may or may not be a customer of that bank. The loan must have been funded for the bank to be able to afford to transfer the deposit away. Now you may get some deposit back that same day but the funding decision has to be made before. Anyway, neither funding or pricing determines the amount of lending these days, capital ratios are the limiting constraint.
- stephen_g 8y ago
  The bank needs liquidity to settle inter-bank transfers after they've lent, some of that is deposits but they can also just borrow reserves from other banks if they need to do that. The lending itself created new bank credit, it was never "funded". If the bank has capital adequacy, they make the loan.
- makomk 8y ago
  Ah, but when they transfer that money, it'll be to some customer of some bank whose loan customers will also be transferring money in the other direction. This means, in practice, that the main constraint on a bank's ability to lend money is how willing all the other banks are to lend money at the time. The Bank of England paper linked earlier in the thread explains why this has undesirable economic implications that are missed by the incorrect money multiplier model.
- neilwilson 8y ago
  When the deposit is transferred away essentially the target bank becomes the depositor in the source bank. That's effectively what 'interbank lending' is. The central bank system then centralises that peer-to-peer processes. Deposits are swapped for capital in the same way.
kgwgk 8y ago
> You then transfer that credit asset to somebody else to pay them. So the matching deposit disappears from the liabilities side of Lloyd’s balance sheet while the loan remains in the assets side? That leaves the balance sheet unbalanced, doesn’t it?
- soVeryTired 8y ago
  The deposit may disappear from lloyds' liabilities, but it needs to transfer an equivalent amount from its reserve account to (say) Santander's reserve account. So Lloyd's loses both liabilities and assets when someone moves deposits to another bank.
  - kgwgk 8y ago
    Of course, my point is that neilwilson’s statement (emphasis mine): “When lloyds creates another loan it automatically creates the matching deposit. (..) Deposits have no quantity control function on lending.” is at best misleading. A bank with an empty balance sheet cannot give a loan. Lending money is transforming one asset (reserves) into another (loan). The fact that the loan is created as a new deposit in the name of the borrower, keeping the reserves constant, muddles the issue a bit but the simplest description of the process is something like: 1) D makes a $1mn cash deposit at the bank. The bank has liabilities: $1mn owed to D and assets: $1mn in cash. 2) The bank lends $1mn in cash to B. The bank has liabilities: $1mn owed to D and assets: $1mn lent to B. We can add an intermediate step where the loan is still a deposit at the bank (liabilities: $1mn owed to D. + $1mn owed to B., assets: $1mn in cash + $1mn lent to B.) but it is just a distraction. Not many people borrows money to keep it in a deposit at the same bank.
    - neilwilson 8y ago
      That's not the case. A bank with an empty balance sheet can give a loan. It is simply Dr Loans, Cr Deposits. That's it. Nobody ever makes cash deposits into a bank. The cash is just burned when the bank receives it (if it is worn enough). A cash deposit to a bank is just a deposit transfer from the central bank. Cash is just a receipt for entries already at the central bank. You are starting half way down the process. To take your example 1) The balance sheet is $1mn Fed deposit asset, $1mn Credit to D. 2) The Balance sheet is $1mn Fed deposit asset + $1mn Loan Asset to B, $1mn Credit to B, $1mn Credit to D. 3) If the cash is withdrawn then the Fed deposit asset and the Credit to B is marked down. The cash will be new cash issued as a receipt for the deposit at the Fed. You can do exactly the same without the deposit of D first. At that point the Fed asset would be negative and become the lender with the loan posted as collateral.

cm2187 8y ago

When you lend to someone, he is free to transfer the money immediatly to whomever, who may or may not be a customer of that bank. The loan must have been funded for the bank to be able to afford to transfer the deposit away. Now you may get some deposit back that same day but the funding decision has to be made before. Anyway, neither funding or pricing determines the amount of lending these days, capital ratios are the limiting constraint.

stephen_g 8y ago
The bank needs liquidity to settle inter-bank transfers after they've lent, some of that is deposits but they can also just borrow reserves from other banks if they need to do that. The lending itself created new bank credit, it was never "funded". If the bank has capital adequacy, they make the loan.
makomk 8y ago
Ah, but when they transfer that money, it'll be to some customer of some bank whose loan customers will also be transferring money in the other direction. This means, in practice, that the main constraint on a bank's ability to lend money is how willing all the other banks are to lend money at the time. The Bank of England paper linked earlier in the thread explains why this has undesirable economic implications that are missed by the incorrect money multiplier model.
neilwilson 8y ago
When the deposit is transferred away essentially the target bank becomes the depositor in the source bank. That's effectively what 'interbank lending' is. The central bank system then centralises that peer-to-peer processes. Deposits are swapped for capital in the same way.

kgwgk 8y ago

> You then transfer that credit asset to somebody else to pay them. So the matching deposit disappears from the liabilities side of Lloyd’s balance sheet while the loan remains in the assets side? That leaves the balance sheet unbalanced, doesn’t it?

soVeryTired 8y ago
The deposit may disappear from lloyds' liabilities, but it needs to transfer an equivalent amount from its reserve account to (say) Santander's reserve account. So Lloyd's loses both liabilities and assets when someone moves deposits to another bank.
- kgwgk 8y ago
  Of course, my point is that neilwilson’s statement (emphasis mine): “When lloyds creates another loan it automatically creates the matching deposit. (..) Deposits have no quantity control function on lending.” is at best misleading. A bank with an empty balance sheet cannot give a loan. Lending money is transforming one asset (reserves) into another (loan). The fact that the loan is created as a new deposit in the name of the borrower, keeping the reserves constant, muddles the issue a bit but the simplest description of the process is something like: 1) D makes a $1mn cash deposit at the bank. The bank has liabilities: $1mn owed to D and assets: $1mn in cash. 2) The bank lends $1mn in cash to B. The bank has liabilities: $1mn owed to D and assets: $1mn lent to B. We can add an intermediate step where the loan is still a deposit at the bank (liabilities: $1mn owed to D. + $1mn owed to B., assets: $1mn in cash + $1mn lent to B.) but it is just a distraction. Not many people borrows money to keep it in a deposit at the same bank.
  - neilwilson 8y ago
    That's not the case. A bank with an empty balance sheet can give a loan. It is simply Dr Loans, Cr Deposits. That's it. Nobody ever makes cash deposits into a bank. The cash is just burned when the bank receives it (if it is worn enough). A cash deposit to a bank is just a deposit transfer from the central bank. Cash is just a receipt for entries already at the central bank. You are starting half way down the process. To take your example 1) The balance sheet is $1mn Fed deposit asset, $1mn Credit to D. 2) The Balance sheet is $1mn Fed deposit asset + $1mn Loan Asset to B, $1mn Credit to B, $1mn Credit to D. 3) If the cash is withdrawn then the Fed deposit asset and the Credit to B is marked down. The cash will be new cash issued as a receipt for the deposit at the Fed. You can do exactly the same without the deposit of D first. At that point the Fed asset would be negative and become the lender with the loan posted as collateral.