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You should read the article, because it seems you're the one with the misconception. how it works -> "if a bank has $1 million in deposits (of actual cash that

You should read the article, because it seems you're the one with the misconception. how it works -> "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" not how it works -> "if a bank has $1 million in deposits it can make only $900k in loans"

kgwgk 5y ago
What the article says is that to lend out more than $900k it has to increase it reserves (maybe borrowing from other banks). Not that it can lend out $10m with just $1m in deposits. “By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending.”
- louloulou 5y ago
  >through deposits or other liabilities This is entirely the point. The money created goes back to the bank as deposits and new money is created on top of this. i.e. 0.9^0+0.9^1+0.9^2+0.9^3+... = 10
  - kgwgk 5y ago
    The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank. It will typically end in another bank. Then the bank that gave you those $900k still has just $1m in reserves and cannot lend anymore. Unless it gets some deposits or additional funding from another bank (maybe the one where those $900k ended). It seems we all agree that “if a bank has $1 million in deposits it can make only $900k in loans.” In the aggregate banking system there are now $900k more, some bank may use the reserves created by that deposit to lend $810k, etc. That’s not the same as how it works -> "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" which is wrong.
    - louloulou 5y ago
      I'm afraid you're simply wrong and need to do some more research. There's no magical point in time where money is "in use". It is always credited to someone's bank account at any given point in time. The baking system as a whole is leveraged about 9:1 based on the previous example. A bank deposit is a bank deposit, regardless of which bank it is at.
      - kgwgk 5y ago
        You didn’t say "if the banking system as a whole has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the system banking as a whole can make $10 million in loans" [and there will be in the end $11m in deposits in the banking system as a whole, offsetting the $1m in reserves and $10m in loans] You said "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" [which is wrong unless you assume that every loan remains in that bank as a deposit so the “banking system as a whole” case is recovered] Of course that bank could get more reserves to be able to make additional loans. But then it could lend much more than $10m if it gets enough deposits/reserves! [One bank =/= The banking system as a whole] Edit: by the way, I’m curious what is the thing in my previous comment that you find “simply wrong”.
        louloulou 5y ago
        I mean apologies if I'm misunderstanding what you're saying - but as far as I can tell you're claiming the leverage ratio for a bank is 0.9:1 and I'm saying it is 9:1. If that's the case only one of us can be correct. It doesn't help that you're conflating the terms "deposits" and "reserves". Deposits are liabilities of the bank, while reserves are assets held in their account at the central bank. If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1.
        kgwgk 5y ago
        What I’m saying is that if you create a bank and I make a $1m deposit [0] your bank has Liabilities : deposit $1m Assets : reserves $1m Now you can lend $900k to someone, who takes the money and tranfers it to someone else’s account in another bank to buy bitcoins or whatever. Your bank has now Liabilities : deposit $1m Assets : reserves $100k, loan $900k And you cannot make more loans until you increase your reserves which means getting new deposits (so we’re no longer talking about a bank with $1m in deposits). Say you get an additional million in deposits, your bank has now Liabilities : deposits $2m Assets : reserves $1.1m, loan $900k And it could lend and additional $900k. Alternatively, it could get funding from another source like borrowing from banks of issuing bonds. For example Liabilities : deposit $1m, bond $1m Assets : reserves $1.1m, loan $900k I don’t think any of this is controversial, let alone wrong. By the way, for simplicity in those balanced sheets the “reserves” is all the funding available which has not been lent, not just the required reserves ($100k for $1m in deposits, etc.) > If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1. One of the main points of the paper under discussion is that this doesn’t happen. Reserves are not a binding constraint on lending. [0] I don’t know if it makes much sense to talk about whether it is “actual cash”. Maybe my employer took a loan to pay me, maybe not. Maybe it was in cash, maybe by cheque, maybe by bank transfer. Would that change anything?

kgwgk 5y ago

What the article says is that to lend out more than $900k it has to increase it reserves (maybe borrowing from other banks). Not that it can lend out $10m with just $1m in deposits. “By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending.”

louloulou 5y ago
>through deposits or other liabilities This is entirely the point. The money created goes back to the bank as deposits and new money is created on top of this. i.e. 0.9^0+0.9^1+0.9^2+0.9^3+... = 10
- kgwgk 5y ago
  The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank. It will typically end in another bank. Then the bank that gave you those $900k still has just $1m in reserves and cannot lend anymore. Unless it gets some deposits or additional funding from another bank (maybe the one where those $900k ended). It seems we all agree that “if a bank has $1 million in deposits it can make only $900k in loans.” In the aggregate banking system there are now $900k more, some bank may use the reserves created by that deposit to lend $810k, etc. That’s not the same as how it works -> "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" which is wrong.
  - louloulou 5y ago
    I'm afraid you're simply wrong and need to do some more research. There's no magical point in time where money is "in use". It is always credited to someone's bank account at any given point in time. The baking system as a whole is leveraged about 9:1 based on the previous example. A bank deposit is a bank deposit, regardless of which bank it is at.
    - kgwgk 5y ago
      You didn’t say "if the banking system as a whole has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the system banking as a whole can make $10 million in loans" [and there will be in the end $11m in deposits in the banking system as a whole, offsetting the $1m in reserves and $10m in loans] You said "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" [which is wrong unless you assume that every loan remains in that bank as a deposit so the “banking system as a whole” case is recovered] Of course that bank could get more reserves to be able to make additional loans. But then it could lend much more than $10m if it gets enough deposits/reserves! [One bank =/= The banking system as a whole] Edit: by the way, I’m curious what is the thing in my previous comment that you find “simply wrong”.
      - louloulou 5y ago
        I mean apologies if I'm misunderstanding what you're saying - but as far as I can tell you're claiming the leverage ratio for a bank is 0.9:1 and I'm saying it is 9:1. If that's the case only one of us can be correct. It doesn't help that you're conflating the terms "deposits" and "reserves". Deposits are liabilities of the bank, while reserves are assets held in their account at the central bank. If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1.
        kgwgk 5y ago
        What I’m saying is that if you create a bank and I make a $1m deposit [0] your bank has Liabilities : deposit $1m Assets : reserves $1m Now you can lend $900k to someone, who takes the money and tranfers it to someone else’s account in another bank to buy bitcoins or whatever. Your bank has now Liabilities : deposit $1m Assets : reserves $100k, loan $900k And you cannot make more loans until you increase your reserves which means getting new deposits (so we’re no longer talking about a bank with $1m in deposits). Say you get an additional million in deposits, your bank has now Liabilities : deposits $2m Assets : reserves $1.1m, loan $900k And it could lend and additional $900k. Alternatively, it could get funding from another source like borrowing from banks of issuing bonds. For example Liabilities : deposit $1m, bond $1m Assets : reserves $1.1m, loan $900k I don’t think any of this is controversial, let alone wrong. By the way, for simplicity in those balanced sheets the “reserves” is all the funding available which has not been lent, not just the required reserves ($100k for $1m in deposits, etc.) > If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1. One of the main points of the paper under discussion is that this doesn’t happen. Reserves are not a binding constraint on lending. [0] I don’t know if it makes much sense to talk about whether it is “actual cash”. Maybe my employer took a loan to pay me, maybe not. Maybe it was in cash, maybe by cheque, maybe by bank transfer. Would that change anything?