4 ms·

There's no limit to the multiple. The 'fractional reserve banking' model is just wrong. (That there are no real reserve requirements in places like Canada or t

There's no limit to the multiple. The 'fractional reserve banking' model is just wrong. (That there are no real reserve requirements in places like Canada or the UK, should really tell people this). In reality it works like this. Loans create deposits. So you lend $10 million and end up with $10 million of loans and $10 million of deposits. The regulator then says you have insufficient capital, so you issue equity or bonds to the tune of $1 million and convince 10% of your depositors to swap their deposits (that you created) for that equity/bond by setting an appropriate interest rate on it. Rinse and repeat until you run out of people to lend to at a price they are prepared to pay. Neither deposits, nor equity have a quantity control function. It's all about the price, not the quantity. In other words the amount of money in the system floats at the current price of money.

cm2187 8y ago
> There's no limit to the multiple. That is factually wrong. You have significant capital requirement both in term of RWA or Leverage Exposure (the latter is more likely to be binding for mortgages), particularly in the UK which along with Switzerland gold pleated every international (BIS, EU) regulations. Banks cannot extend their balance sheet indefinitely, and if you look at UK banks, they significantly deleveraged since the financial crisis, as they adapted to new regulations. In fact these capital requirements, along with increased liquidity requirement are probably why the multiplier effect considerably reduced after the crisis.
- neilwilson 7y ago
  It's factually correct. Deposits are created and then converted into the required capital at a price. To buy equity you need to use a deposit, and that comes from a prior loan. That's just how it works. Same with liquidity which is just increased amounts of loans to the central bank (government) in the form of government bonds. Collateral uplift can give you that. All these just add to the cost of the bank, which changes the price and that reduces the number of people taking the loans. But the fact remains that the quantity floats at the current price of money. Liquidity and capital requirements just change the current price of money.

cm2187 8y ago

> There's no limit to the multiple. That is factually wrong. You have significant capital requirement both in term of RWA or Leverage Exposure (the latter is more likely to be binding for mortgages), particularly in the UK which along with Switzerland gold pleated every international (BIS, EU) regulations. Banks cannot extend their balance sheet indefinitely, and if you look at UK banks, they significantly deleveraged since the financial crisis, as they adapted to new regulations. In fact these capital requirements, along with increased liquidity requirement are probably why the multiplier effect considerably reduced after the crisis.

neilwilson 7y ago
It's factually correct. Deposits are created and then converted into the required capital at a price. To buy equity you need to use a deposit, and that comes from a prior loan. That's just how it works. Same with liquidity which is just increased amounts of loans to the central bank (government) in the form of government bonds. Collateral uplift can give you that. All these just add to the cost of the bank, which changes the price and that reduces the number of people taking the loans. But the fact remains that the quantity floats at the current price of money. Liquidity and capital requirements just change the current price of money.