5 ms·

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

by 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.
- kgwgk 8y ago
  “I find it difficult to understand how this flow of funds analysis validates an assertion of general principle. What is described is a special case where a highly leveraged bank could find itself temporarily insolvent, with a very limited window of exposure before the bank would be found guilty of criminal fraud.” https://www.cooperative-individualism.org/dodson-edward_review-of-richard-werner-can-banks-individually-create-money-out-of-nothing-2015.htm https://www.cooperative-individualism.org/dodson-edward_revi...
soVeryTired 8y ago
I think the problem with what you're saying is the ambiguous use of the word 'cash'. Deposits, reserves, and physical currency are all 'cash' in some sense, but here it helps to be precise. Banks don't 'lend out cash', they create deposits. Deposits are liabilities for banks. When a bank takes on a deposit, it also takes on a corresponding asset: either a loan in its books, or an increase in its reserve account. In practice the reserve ratio is unimportant for a bank: in Canada and the UK the ratio is 0%. The real constraint on a banks ability to create money is it's leverage ratio, i.e. (assets - liabilities)/assets. In reality the formula is more complicated and uses risk weighting by asset class, but that's the crux of it.

by derriz 8y ago

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.

kgwgk 8y ago
“I find it difficult to understand how this flow of funds analysis validates an assertion of general principle. What is described is a special case where a highly leveraged bank could find itself temporarily insolvent, with a very limited window of exposure before the bank would be found guilty of criminal fraud.” https://www.cooperative-individualism.org/dodson-edward_review-of-richard-werner-can-banks-individually-create-money-out-of-nothing-2015.htm https://www.cooperative-individualism.org/dodson-edward_revi...

soVeryTired 8y ago

I think the problem with what you're saying is the ambiguous use of the word 'cash'. Deposits, reserves, and physical currency are all 'cash' in some sense, but here it helps to be precise. Banks don't 'lend out cash', they create deposits. Deposits are liabilities for banks. When a bank takes on a deposit, it also takes on a corresponding asset: either a loan in its books, or an increase in its reserve account. In practice the reserve ratio is unimportant for a bank: in Canada and the UK the ratio is 0%. The real constraint on a banks ability to create money is it's leverage ratio, i.e. (assets - liabilities)/assets. In reality the formula is more complicated and uses risk weighting by asset class, but that's the crux of it.