3 ms·

"Banks lend deposits" it's just another way to say that the causality is: "banks have reserves" -> "banks lend the reserves that they have" instead of: "bank

"Banks lend deposits" it's just another way to say that the causality is: "banks have reserves" -> "banks lend the reserves that they have" instead of: "banks lend when make business sense" -> "then they search for reserves" If a bank can do the second option, it doesn't make sense to say that a bank is lending deposits. In fact, saying that is mudding the issue. There is an empirical way to know: going to a credit department in a bank, ask the person in charge if they know how much they can lend or only in what conditions they can lend. I have heard from several sources that it's the second. Here is an interesting paper about the issue: https://www.sciencedirect.com/science/article/pii/S1057521914001070 https://www.sciencedirect.com/science/article/pii/S105752191...

eru 6y ago
Banks keep some buffer of funds around. As a simple analogy: on a basic level, I eat what I buy in the grocery store. And with more details: I keep some food in the fridge. I always just eat when it makes business sense to do so. But when my fridge is running low, I get more food from the grocery store.
- RobertoG 6y ago
  In your analogy, the food is the reserves the bank has. You eat your food (lend), check if you have enough food in your fridge and if you don't you go to the grocery store and get more. Never mind how much food you eat, for the purposes of your fridge, the grocery store has an infinite supply. So, independently of how much you eat, you can always fill your fridge. You don't stop eating because you are afraid you can't fill the fridge again.
  - eru 6y ago
    Well, if food prices go up too much, I will moderate my eating. Or change from meat to oatmeal. Similar for a bank. If deposits or interbank funds become to hard to come by, they'll curtail lending. In any case, it seems like we mostly agree on what's actually happening. (Though just to make sure, do you understand and/or agree on the scenario where there are no legal reserve requirements?) Our main difference is in whether we treat 'banks lend deposits' as a valid description. Btw, you are right that strictly speaking banks don't have to have reserves on hand in the logical second when they make the loan. But they do almost immediately need the reserves (eg deposits) when the debtor starts spending.

eru 6y ago

Banks keep some buffer of funds around. As a simple analogy: on a basic level, I eat what I buy in the grocery store. And with more details: I keep some food in the fridge. I always just eat when it makes business sense to do so. But when my fridge is running low, I get more food from the grocery store.

RobertoG 6y ago
In your analogy, the food is the reserves the bank has. You eat your food (lend), check if you have enough food in your fridge and if you don't you go to the grocery store and get more. Never mind how much food you eat, for the purposes of your fridge, the grocery store has an infinite supply. So, independently of how much you eat, you can always fill your fridge. You don't stop eating because you are afraid you can't fill the fridge again.
- eru 6y ago
  Well, if food prices go up too much, I will moderate my eating. Or change from meat to oatmeal. Similar for a bank. If deposits or interbank funds become to hard to come by, they'll curtail lending. In any case, it seems like we mostly agree on what's actually happening. (Though just to make sure, do you understand and/or agree on the scenario where there are no legal reserve requirements?) Our main difference is in whether we treat 'banks lend deposits' as a valid description. Btw, you are right that strictly speaking banks don't have to have reserves on hand in the logical second when they make the loan. But they do almost immediately need the reserves (eg deposits) when the debtor starts spending.