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Banks don’t really borrow from depositors[1]. That is a great description from an authoritative source. The US system is substantially the same. Having a bankin

• rahimnathwani 6y ago
  From an article linked from [1]: "Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank.(4)(5) Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation.(6) And in the modern economy, those bank deposits are mostly created by commercial banks themselves." The information you yourself linked says that 97% of broad money is made up of bank deposits, and that bank deposits are 'essentially IOUs from commercial banks to households'. This supports what I said: that bank deposits are loans from depositors to banks. A bank can create an unlimited amount of money by issuing a loan: through a simple journal entry, it can create: - a loan for $1 billion (owed by customer X) - a deposit account for customer X (containing $1 billion) But an SPDI can't do that, as it has to have liquid cash for the total amount among all deposit accounts.
  • User23 6y ago
    Everything you said there agrees with my understanding. The difference is that in aggregate the bank doesn't borrow deposits from its customers, it creates deposits for its customers. It's a subtle distinction. Maybe a more direct way of putting it is that the loanable funds model is observably incorrect. As you note, creating a deposit is just a balance sheet expansion, limited only by reserve requirements and capitalization and not at all by the presence of any depositors. And currently in the USA there are no reserve requirements and as far as I can tell capitalization is largely a shell game of packaging loans into various financial instruments that satisfy the legal requirements and trading them with other banks. I didn't know that about SPDIs, thanks. It certainly does diminish the value of the banking license if they can't create USD deposits like a normal bank.
    • wbl 6y ago
      You only have deposits if someone puts the deposits in.
      • rahimnathwani 6y ago
        That's not quite correct. If you apply for a $10k loan from a bank then, once the loan is approved, the bank will simultaneously: - increase your current account balance by $10k (credit your current account) - increase your loan account balance by $10k (debit your loan account) That $10k deposit appeared from nowhere. You didn't 'put the deposit in', and it wasn't transferred from another customer or another bank. And the bank does not need to have $10k sourced from somewhere else. Of course, when you want to withdraw that that $10k, or transfer it to someone who uses a different bank, the bank will have to come up with $10k from somewhere. But maybe whatever they are called up to transfer to customers of other banks will be balanced out by transfers from other banks' customers to their own.
        • pash 6y ago
          > If you apply for a $10k loan from a bank then, once the loan is approved, the bank will simultaneously: - increase your current account balance by $10k (credit your current account) - increase your loan account balance by $10k (debit your loan account) That $10k deposit appeared from nowhere. You didn't 'put the deposit in', and it wasn't transferred from another customer or another bank. And the bank does not need to have $10k sourced from somewhere else. This is not correct. A bank lends against its cash assets, not against nothing. Bank accounting works like so: when you deposit $1 at the bank, the bank’s assets increase by $1 (the $1 you just gave it), and its liabilities also increase by $1 (the bank owes you your dollar back when you want it). A bank’s loans are financed by its assets; each dollar it lends is a dollar taken from the asset side of its balance sheet. When a bank lends you $1, it (1) decrements its asset balance by $1, (2) increments your bank account by $1, (3) creates a new asset representing a $1 loan on its own balance sheet, and (4) creates a new liability for you representing a loan of $1 owed. Point is, a bank does not create money from absolutely nothing when making loans in the way you describe. All loans are financed by the bank’s assets, and a bank cannot originate a larger value of loans than the value of its cash assets. Bank “money-creation” refers to the fact that the total bank account balances in the economy increase when a bank makes a loan; this happens after what I described in the previous paragraph, since the $1 loan now increments your bank account, while nobody else’s bank account balance decreases. (To see how this works in more detail, imagine the process begins with Alice depositing a one-dollar bill at the bank, and then the bank loaning Bob one dollar. Keep track of the distinction between who has the one-dollar bill and who has a one-dollar bank account balance. The loan proceeds as follows: first the bank gives Bob the one-dollar bill it took from Alice as a deposit, then Bob turns right around and deposits the one-dollar bill back at the bank. The result is that Alice and Bob now both have $1 bank account balances after the loan is made, whereas only Alice did before; the bank still has the one-dollar bill. Summing either bank account balances alone or balances plus dollar bills shows $1 more after the loan was made.)
• baobabKoodaa 6y ago
  > Having a banking license has huge advantages, namely being able to create money out of thin air ... No, the ability to create money out of thin air is related to the act of lending itself, it has nothing to do with a banking license. I wrote about this at length here: https://www.attejuvonen.fi/money-out-of-thin-air/ https://www.attejuvonen.fi/money-out-of-thin-air/
  • User23 6y ago
    You're technically correct. We could create money out of thin air if you chose to accept my IOUs. But pragmatically you're exceedingly more likely to accept my IOUs if I have a banking license. Promissory notes are a thing and occasionally used for real estate transactions among other things, so it's not like it's just theoretical, but most private individuals will never issue an IOU, written or otherwise, for more than the cost of dinner. Edit: Also your article is a nice introduction to the concept. Another good example is when the State of California started paying its bills with Registered Warrants[1] when it ran out of money a few years back. They don't have a banking license, but they do have taxing authority over a trillion dollar economy so banks were actually willing to allow warrant holders to deposit them. In large part this is because they can be transferred and can be used to extinguish California tax liabilities. Needless to say a sovereign State also has other ways to coerce banks operating in its territory, but to my knowledge no such measures were necessary. Another fun example is Amazon gift cards. Their effective value can be up to whatever planned spend you can offset. It's basically an IOU redeemable for goods or services. I imagine it wouldn't too to hard to talk a private individual into accepting an Amazon gift card at near par to settle a debt. [1] https://www.sco.ca.gov/eo_registered_warrants_2009_faqs.html https://www.sco.ca.gov/eo_registered_warrants_2009_faqs.html
  • rahimnathwani 6y ago
    If you ask me to prove I have $10,000 of money, available to spend, which of the following would you accept as proof: A) $10,000 of cash. B) Seeing my balance at a bank (e.g. entering the bank URL on a device you control, and then watching as I log in and navigate to the statement). C) Proof that a non-bank company owes me $10,000. Most people would only count A and B, because they're perfectly liquid.