3 ms·
> 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 m
by 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 8y agoIt'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.