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Banks inherently gamble with customers deposits, every loan is a gamble. They also can invest in certain types of debt securities, there’s security regulations

Banks inherently gamble with customers deposits, every loan is a gamble. They also can invest in certain types of debt securities, there’s security regulations but that isn’t bad on its own. What FTX did is much worse. They spent their customer’s money on stupid shit like the Miami Heat stadium, political donations, and charity work (which was legitimately really good but not their choice to make), and then replenished their own coffers by making their own crypto out of nothing and assigning it to themselves. They essentially stole their customer’s money.

seabrookmx 4y ago
> Banks inherently gamble with customers deposits, every loan is a gamble While there's a ton of nuance here, in the general case it doesn't work how you've implied. When you take out a mortgage, the bank doesn't take a bunch of money other people have deposited. It's literally created out of thin air and marked as a liability on their balance sheet. This is how the majority of money is created in a fractional reserve banking system.
- fspeech 4y ago
  It's not exactly out of "thin air", since we are trying to be nuanced here. If you take out a mortgage to buy a house the bank does loan you the money out of their own funds. It's just that the seller who receives your funds will put the money back into the banks (not necessarily the same bank, but the money market is there for the banks to settle among themselves). So in effect the sellers make the loans to buyers, intermediated through the financial system.
  - JumpCrisscross 4y ago
    > the bank does loan you the money out of their own funds Nope. This is the toy model of money and banking taught in high school. When a bank makes a loan, it creates money. The fact that there are stabilising deposits is a fortunate convenience. This is why leveraged finance is inherently unstable. The BoE had a good paper about this.
    - chii 4y ago
      > When a bank makes a loan, it creates money. The bank must reach some level of capital requirement to make this loan. In other words, if the bank does not have enough reserves, they cannot make this loan. The bank can use customer deposits as part of their reserves. They can also borrow from another bank (presumably, paying them interest). Lastly, i think central banks also have a reserve borrowing method (but not sure about this).
      - deleted 4y ago
        [deleted]
      - JumpCrisscross 4y ago
        > bank must reach some level of capital requirement to make this loan No, they don’t. We force them to through fiat. But credit isn’t created from money—credit is money. Left to their own devices, financial systems create as much credit as the market will bear, then the market shifts, money vanishes and voila, a panic.
        chii 4y ago
        and after said panic, you end up with "some level of capital requirement to make this loan". "we force them through fiat", is just the same as "we force everybody to not murder and steal".
    - deleted 4y ago
      [deleted]
    - fspeech 4y ago
      What do you mean "toy model"? It is how it works operationally. Banks have to settle up by end of each business day or they are out of the business. The fact money is created with loans in a fractional reserve system does not negate operational constraints.
      - cturner 4y ago
        The toy model is the idea that a bank gets deposit from one customer and loans it to another. This is not how it works. If you go to a bank for a loan, they do a risk assessment of you, and then make some marks on a ledger. As a result of this, new money appears in your account. But - what stops banks from creating infinite money? There is a byzantine system of rules laid out by the Basel Accords and national regulators within that. That system limits the activities a bank can conduct, lays out rules for the way it must go about business it can conduct, and sets capital requirements. There is nothing close to a full reserve and the system is not defined in those terms. Rather, there are ratios. If you have so many AAA rated treasuries posted with your central bank, then you can grow your balance sheet by X. But for B rated investments, you can only grow your balance sheet by Y. When a commercial bank issues a loan, it literally creates money.
- vba616 4y ago
  Don't you have that backwards? My mortgage is the bank's asset. My checking or savings account is the bank's liability.
  - arcticbull 4y ago
    When you bring money to a bank, that money is treated as both a liability (to you) and also as collateral against which the bank can lend money to others. When a bank lends money to you, it's net neutral. A $100,000 mortgage creates a -$100,000 position on the bank's liabilities list and a $100,000 deposit in your bank account. They create $100K in new money to fund this loan collateralized by both the reserves on deposit at the bank and by the property which you purchased. As you repay that balance, the money that was created to fund your loan blinks out of existence. It is the constant origination of new loans and the constant repayment of old debt which defines the supply of money in the economy - which is why interest rates matter. Neat huh. I would argue that your balance is both an asset and a liability as defined by your bank's reserve requirements. Your mortgage is net neutral to the bank except for the interest paid on it, which is an annuity of sorts with a net present value offset by the difference between projected recovery rates and your risk of default. The value there is itself created in the origination and underwriting process.
    - patrickthebold 4y ago
      Not gp but I've so many questions! We'll I'll just ask two: Suppose to buy my house the seller wants cash. I take out my cash and give it to the seller. Ok fine, but the bank is creating money out of thin air, where does the cash come from if lots of people do the same? Follow up: more realistically, I wire money to the seller, what actually happens between the banks? It seems like bank A creates money from nothing and sends it to bank B, what is stopping bank A from sending out an infinite amount of money to other banks?
      - chii 4y ago
        > where does the cash come from if lots of people do the same? the cash comes from the gov't printing it. It's a mere fraction of all spendable money. Banks store some amount of it, just for such cases where you wish to withdraw it. If everyone demands their deposit as cash, the bank would run out of physical notes very quickly. They would, in all likelihood, ask the central bank to print the cash (in exchange for the reserves they hold at the CB), in order to fulfill the withdrawal. This might take days, weeks even, depending on how many notes are to be printed. Note that this isn't printing new money - it's merely transforming digitally stored money into physical paper. > I wire money to the seller Bank A would have an account within Bank B, and vice versa. At the end of the day, these banks "settle" their accounts; aka, if there's more money in Account A (in Bank B), it means Bank A has sent more money to Bank B, and Bank B needs to owe Bank A. This is basically how international transfers work. For local banks, it's likely that the Central Bank would clear these transfers up (aka, Central Banks are the banks for banks). > what is stopping bank A from sending out an infinite amount of money to other banks? The same reason why a bank cannot just create infinite money and spend it on hookers and blow. They are creating money only via lending, and there are laws regarding how much they're allowed to lend out (called reserve requirements).
- colinmhayes 4y ago
  No, banks loan customer funds out as mortgages. It is not literally created out of thin air. You deposit money, the bank gives it to joe to buy a house, he sends it to the seller. Now the seller has your physical money, and joe owes the bank what the bank owes you.
  - timcavel 4y ago
- cm2187 4y ago
  It's not, this is a common economist fallacy. In practice the bank cannot make a new loan if it doesn't have the liquidity and doesn't have the funding. You may elect to keep the money on a bank account at that bank, in which case it looks like the bank just made two accounting entries, but you often buy something for it which means the money goes away. Whatever you do, the bank couldn't make that loans if it didn't have the liquidity for that loans sitting around.
  - seabrookmx 4y ago
    There's certainly rules around how much liquidity a bank needs when lending (otherwise they could lend infinitely), but they don't need liquidity equal to all their loans. That's why it's called fractional reserve.. they only need a fraction of the funds in reserve.
    - cm2187 4y ago
      Regulatory liquidity requirements are essentially a function of their deposits not their loans (LCR - though some credit is given to incoming cash flows). But I am not even talking about that. From a very practical point of view, the bank will not allow you to draw on a loan if it doesn't have the cash for it. Only the central bank can create money out of thin air. To take a very simplistic example, let's say we start with an empty economy, no money anywhere. The central bank creates 100 out of thin air and buys something from an individual. That individual places the money as deposit with bank A. Now bank A has 100 deposit liabilities, and 100 cash (deposit at central bank). Now another individual can borrow from bank A and place the money with bank B, so now bank A has a 100 deposit liability and 100 loan asset. Bank B has a 100 deposit liability and 100 cash asset (deposit at central bank). This is the money multipler, m2 = 300, 100 in bank A, 100 in bank B and 100 at central bank, whereas the central bank only has created 100 of m1. However bank A cannot make a new loan out of thin air, it doesn't have cash anymore. The capacity to make loans is with bank B, where the cash is. It is not the case that banks can make loans with no consideration for their funding and liquidity position, just by creating two accounting entries, only the central bank can do that.
eitland 4y ago
> Banks inherently gamble with customers deposits, every loan is a gamble. I wouldn't exactly call a residential mortgage a gamble. Not the loan for my car either, the bank has first priority in both and demands I insurance them for the full value and for all eventualities.
- Godel_unicode 4y ago
  Lehman brothers would like a word with you.
  - eitland 4y ago
    I answered to a comment that said every loan is a gamble.
    - Godel_unicode 4y ago
      Lehman was brought down by not adequately understanding the risks they took gambling on mortgages.
      - eitland 4y ago
        Apples and oranges. The original comment that I answered is technically false if there exist a single mortgage that isn't a gamble. Now, if only a single such mortgage existed you’d still have a point, but the fact is millions of loans are given and paid back every year without any complications at all: there is plenty of income and plenty of security for very many loans. IIRC, what Lehman did was to deliberately trade in bundles of sub prime loans.
        Godel_unicode 4y ago
        Nope, just smaller apples and bigger apples. There’s no such thing as a mortgage that isn’t a gamble. At best you can say there are mortgages which are safer (even much much safer) than others. “There’s no risk here” is what causes financial crises and bank runs, which is the larger point.

seabrookmx 4y ago

> Banks inherently gamble with customers deposits, every loan is a gamble While there's a ton of nuance here, in the general case it doesn't work how you've implied. When you take out a mortgage, the bank doesn't take a bunch of money other people have deposited. It's literally created out of thin air and marked as a liability on their balance sheet. This is how the majority of money is created in a fractional reserve banking system.

fspeech 4y ago
It's not exactly out of "thin air", since we are trying to be nuanced here. If you take out a mortgage to buy a house the bank does loan you the money out of their own funds. It's just that the seller who receives your funds will put the money back into the banks (not necessarily the same bank, but the money market is there for the banks to settle among themselves). So in effect the sellers make the loans to buyers, intermediated through the financial system.
- JumpCrisscross 4y ago
  > the bank does loan you the money out of their own funds Nope. This is the toy model of money and banking taught in high school. When a bank makes a loan, it creates money. The fact that there are stabilising deposits is a fortunate convenience. This is why leveraged finance is inherently unstable. The BoE had a good paper about this.
  - chii 4y ago
    > When a bank makes a loan, it creates money. The bank must reach some level of capital requirement to make this loan. In other words, if the bank does not have enough reserves, they cannot make this loan. The bank can use customer deposits as part of their reserves. They can also borrow from another bank (presumably, paying them interest). Lastly, i think central banks also have a reserve borrowing method (but not sure about this).
    - deleted 4y ago
      [deleted]
    - JumpCrisscross 4y ago
      > bank must reach some level of capital requirement to make this loan No, they don’t. We force them to through fiat. But credit isn’t created from money—credit is money. Left to their own devices, financial systems create as much credit as the market will bear, then the market shifts, money vanishes and voila, a panic.
      - chii 4y ago
        and after said panic, you end up with "some level of capital requirement to make this loan". "we force them through fiat", is just the same as "we force everybody to not murder and steal".
  - deleted 4y ago
    [deleted]
  - fspeech 4y ago
    What do you mean "toy model"? It is how it works operationally. Banks have to settle up by end of each business day or they are out of the business. The fact money is created with loans in a fractional reserve system does not negate operational constraints.
    - cturner 4y ago
      The toy model is the idea that a bank gets deposit from one customer and loans it to another. This is not how it works. If you go to a bank for a loan, they do a risk assessment of you, and then make some marks on a ledger. As a result of this, new money appears in your account. But - what stops banks from creating infinite money? There is a byzantine system of rules laid out by the Basel Accords and national regulators within that. That system limits the activities a bank can conduct, lays out rules for the way it must go about business it can conduct, and sets capital requirements. There is nothing close to a full reserve and the system is not defined in those terms. Rather, there are ratios. If you have so many AAA rated treasuries posted with your central bank, then you can grow your balance sheet by X. But for B rated investments, you can only grow your balance sheet by Y. When a commercial bank issues a loan, it literally creates money.
vba616 4y ago
Don't you have that backwards? My mortgage is the bank's asset. My checking or savings account is the bank's liability.
- arcticbull 4y ago
  When you bring money to a bank, that money is treated as both a liability (to you) and also as collateral against which the bank can lend money to others. When a bank lends money to you, it's net neutral. A $100,000 mortgage creates a -$100,000 position on the bank's liabilities list and a $100,000 deposit in your bank account. They create $100K in new money to fund this loan collateralized by both the reserves on deposit at the bank and by the property which you purchased. As you repay that balance, the money that was created to fund your loan blinks out of existence. It is the constant origination of new loans and the constant repayment of old debt which defines the supply of money in the economy - which is why interest rates matter. Neat huh. I would argue that your balance is both an asset and a liability as defined by your bank's reserve requirements. Your mortgage is net neutral to the bank except for the interest paid on it, which is an annuity of sorts with a net present value offset by the difference between projected recovery rates and your risk of default. The value there is itself created in the origination and underwriting process.
  - patrickthebold 4y ago
    Not gp but I've so many questions! We'll I'll just ask two: Suppose to buy my house the seller wants cash. I take out my cash and give it to the seller. Ok fine, but the bank is creating money out of thin air, where does the cash come from if lots of people do the same? Follow up: more realistically, I wire money to the seller, what actually happens between the banks? It seems like bank A creates money from nothing and sends it to bank B, what is stopping bank A from sending out an infinite amount of money to other banks?
    - chii 4y ago
      > where does the cash come from if lots of people do the same? the cash comes from the gov't printing it. It's a mere fraction of all spendable money. Banks store some amount of it, just for such cases where you wish to withdraw it. If everyone demands their deposit as cash, the bank would run out of physical notes very quickly. They would, in all likelihood, ask the central bank to print the cash (in exchange for the reserves they hold at the CB), in order to fulfill the withdrawal. This might take days, weeks even, depending on how many notes are to be printed. Note that this isn't printing new money - it's merely transforming digitally stored money into physical paper. > I wire money to the seller Bank A would have an account within Bank B, and vice versa. At the end of the day, these banks "settle" their accounts; aka, if there's more money in Account A (in Bank B), it means Bank A has sent more money to Bank B, and Bank B needs to owe Bank A. This is basically how international transfers work. For local banks, it's likely that the Central Bank would clear these transfers up (aka, Central Banks are the banks for banks). > what is stopping bank A from sending out an infinite amount of money to other banks? The same reason why a bank cannot just create infinite money and spend it on hookers and blow. They are creating money only via lending, and there are laws regarding how much they're allowed to lend out (called reserve requirements).
colinmhayes 4y ago
No, banks loan customer funds out as mortgages. It is not literally created out of thin air. You deposit money, the bank gives it to joe to buy a house, he sends it to the seller. Now the seller has your physical money, and joe owes the bank what the bank owes you.
- timcavel 4y ago
cm2187 4y ago
It's not, this is a common economist fallacy. In practice the bank cannot make a new loan if it doesn't have the liquidity and doesn't have the funding. You may elect to keep the money on a bank account at that bank, in which case it looks like the bank just made two accounting entries, but you often buy something for it which means the money goes away. Whatever you do, the bank couldn't make that loans if it didn't have the liquidity for that loans sitting around.
- seabrookmx 4y ago
  There's certainly rules around how much liquidity a bank needs when lending (otherwise they could lend infinitely), but they don't need liquidity equal to all their loans. That's why it's called fractional reserve.. they only need a fraction of the funds in reserve.
  - cm2187 4y ago
    Regulatory liquidity requirements are essentially a function of their deposits not their loans (LCR - though some credit is given to incoming cash flows). But I am not even talking about that. From a very practical point of view, the bank will not allow you to draw on a loan if it doesn't have the cash for it. Only the central bank can create money out of thin air. To take a very simplistic example, let's say we start with an empty economy, no money anywhere. The central bank creates 100 out of thin air and buys something from an individual. That individual places the money as deposit with bank A. Now bank A has 100 deposit liabilities, and 100 cash (deposit at central bank). Now another individual can borrow from bank A and place the money with bank B, so now bank A has a 100 deposit liability and 100 loan asset. Bank B has a 100 deposit liability and 100 cash asset (deposit at central bank). This is the money multipler, m2 = 300, 100 in bank A, 100 in bank B and 100 at central bank, whereas the central bank only has created 100 of m1. However bank A cannot make a new loan out of thin air, it doesn't have cash anymore. The capacity to make loans is with bank B, where the cash is. It is not the case that banks can make loans with no consideration for their funding and liquidity position, just by creating two accounting entries, only the central bank can do that.

eitland 4y ago

> Banks inherently gamble with customers deposits, every loan is a gamble. I wouldn't exactly call a residential mortgage a gamble. Not the loan for my car either, the bank has first priority in both and demands I insurance them for the full value and for all eventualities.

Godel_unicode 4y ago
Lehman brothers would like a word with you.
- eitland 4y ago
  I answered to a comment that said every loan is a gamble.
  - Godel_unicode 4y ago
    Lehman was brought down by not adequately understanding the risks they took gambling on mortgages.
    - eitland 4y ago
      Apples and oranges. The original comment that I answered is technically false if there exist a single mortgage that isn't a gamble. Now, if only a single such mortgage existed you’d still have a point, but the fact is millions of loans are given and paid back every year without any complications at all: there is plenty of income and plenty of security for very many loans. IIRC, what Lehman did was to deliberately trade in bundles of sub prime loans.
      - Godel_unicode 4y ago
        Nope, just smaller apples and bigger apples. There’s no such thing as a mortgage that isn’t a gamble. At best you can say there are mortgages which are safer (even much much safer) than others. “There’s no risk here” is what causes financial crises and bank runs, which is the larger point.