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> banks at least tell you they are loaning your deposits out Side not but that’s not really how banking works. Banks create deposits when they originate loans

by dools 4y ago

> banks at least tell you they are loaning your deposits out Side not but that’s not really how banking works. Banks create deposits when they originate loans and separately look for the assets they need in order to satisfy any regulatory requirements and net flows of funds for inter bank settlements. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

UncleEntity 4y ago
But that’s the principle of how banking works. Nobody expects that their money deposited into a savings account is going to sit in a bank vault until it’s time to go pick it up — they know the bank is going to loan it out and pocket the difference between what they charge the borrower and what they pay in interest. Checking accounts are different in that they should have the money on hand to settle whatever spending the customers get up to but instead they practice fractional reserve deposits with a central bank to bail them out if needed. The difference here is the crypto bros are practicing fractional reserve without someone to bail them out so depositors just get screwed.
- benlivengood 4y ago
  U.S. reserve percentages have been 0% across the board since 2020. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
  - Nursie 4y ago
    I believe this is misleading, yes, reserve requirements are at 0. Capital requirements are not - https://www.federalreserve.gov/supervisionreg/large-bank-capital-requirements.htm https://www.federalreserve.gov/supervisionreg/large-bank-cap... Reserve requirements are about how much cash they must keep as a percentage of their assets, where capital requirements (which are non-zero) are more relevant to the fraction held in fractional reserve systems and are about ensuring solvency.
    - benlivengood 4y ago
      The major difference is that banks can be highly leveraged (and cross-leveraged) under capital requirements only. I think this has to be the case or there wouldn't have been a need or reason to reduce fractional reserve requirements; if banks had been holding their capital as currency or deposits in other institutions then the fractional reserve requirements would have been trivially met since the percentages were lower. As FTX showed, if most of your capital loses its value then you are insolvent. The banking system is just a little more insecure than it was with fractional reserves. I'm happy to be shown that I'm wrong, since I am not an expert.
      - Nursie 4y ago
        I’m not either! Just wanted to point out that the “zero reserves” thing is a bit more complex than purely what US banks are required to keep as cash in the reserve requirements). Further, from the announcement that lead to this, it seems that the reserve requirement is zero because the mechanisms have changed. The reserve requirements appear to have applied specifically to reserve accounts held centrally at the federal reserve. To me this looks very much like a ‘scare’ factoid that can be latched onto and shared in order to persuade people that the banking system is way more fragile than it is, and that it’s collapse is either imminent or inevitable. OMG zero reserves! Dig a bit deeper and that’s partially true and perhaps not all that important, and represents a technical change in operations rather than the massive risk increase it gets portrayed as.
- imtringued 4y ago
  In theory we could do 100% reserve banking with negative interest rates on cash and demand deposits but then "savers" will start complaining how it is draconian to get a certificate of deposit. It's an interesting double standard.
cortesoft 4y ago
The details of how the actual transactions occur might be different, but the general concept of fractional reserve banking is still “loaning out a portion of deposits” https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
- JamesianP 4y ago
  It's more accurate to say they loan out a multiple of deposits based on the inverse of the fraction (the "money multiplier"). If someone puts 1 million in the bank and the fractional reserve is 20 percent, they can now create loans of up to 4 million. Such that the reserve is 20 percent of their total assets of 5 million (= 4 million loans + 1 million cash).
  - qnt 4y ago
    Again no, neither of these are accurate. Modern banks do not operate on a fractional reserve basis at all. This is a falsehood peddled by well out of date undergrad econ textbooks https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
    - JamesianP 4y ago
      I'm describing what fractional reserve means. Technically that fraction has been set to zero very recently so it is trivial though still not false. This was discussed a lot elsewhere on this board.
      - lupire 4y ago
        If that you say is true then banks could lend infinite money to their friends and never collect it.
        imtringued 4y ago
        Well, except the friend part the money supply has never shrunk so far.
baobabKoodaa 4y ago
No, when you take a loan out of a bank, the bank doesn't "create deposits" that it loans to you. The bank loans you existing deposits. The method by which banks end up creating money is less dramatic than you think. I wrote a long-form explainer here: https://www.attejuvonen.fi/money-out-of-thin-air/ https://www.attejuvonen.fi/money-out-of-thin-air/
- qnt 4y ago
  Not at all. When you get a loan, the bank creates a liability and deposit out of thin air. The deposit is a "demand deposit", which is effectively equivalent and fungible to central-bank-backed currency (hence the term "money" usually applies to both, though they are different things). The bank needs no existing customer deposits to create a demand deposit and liability in your account. You should run through your example again, except begin by creating a loan, rather than first beginning by a customer lending the bank a deposit. The BoE article linked above is absolutely correct.
  - dools 4y ago
    Always good to find another MMTer out in the wild ;)
    - unmole 4y ago
      This has absolutely nothing to do with MMT.
      - dools 4y ago
        MMT economists have been instrumental in dispelling many of the popular misunderstandings about how banking works in addition to their work dispelling the many popular misunderstandings about how government finance works. But also qnt is clearly well versed in MMT which is what I was referring to.
  - baobabKoodaa 4y ago
    You claim that the bank needs no existing customer deposits to create a demand deposit and liability in your account. This claim is true only in the pedantic sense: if the bank is otherwise capitalized (e.g. money from investors in the bank), then it could create loans using whatever money it has, as opposed to using money specifically from depositors. However, what you probably meant is that a bank could loan out money even if it has $0 money in the bank. This is not true at all. A bank can not loan out money if it has no money. It has no printing presses that print physical banknotes, and other banks would refuse electronic transfers from a bank which is known to have $0 money. Furthermore, it's not clear to me how you believe that the BoE article contradicts what I'm saying. I'm under the impression that you (along with most other people) are simply misunderstanding what you are reading here.

by dools 4y ago

UncleEntity 4y ago

But that’s the principle of how banking works. Nobody expects that their money deposited into a savings account is going to sit in a bank vault until it’s time to go pick it up — they know the bank is going to loan it out and pocket the difference between what they charge the borrower and what they pay in interest. Checking accounts are different in that they should have the money on hand to settle whatever spending the customers get up to but instead they practice fractional reserve deposits with a central bank to bail them out if needed. The difference here is the crypto bros are practicing fractional reserve without someone to bail them out so depositors just get screwed.

benlivengood 4y ago
U.S. reserve percentages have been 0% across the board since 2020. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- Nursie 4y ago
  I believe this is misleading, yes, reserve requirements are at 0. Capital requirements are not - https://www.federalreserve.gov/supervisionreg/large-bank-capital-requirements.htm https://www.federalreserve.gov/supervisionreg/large-bank-cap... Reserve requirements are about how much cash they must keep as a percentage of their assets, where capital requirements (which are non-zero) are more relevant to the fraction held in fractional reserve systems and are about ensuring solvency.
  - benlivengood 4y ago
    The major difference is that banks can be highly leveraged (and cross-leveraged) under capital requirements only. I think this has to be the case or there wouldn't have been a need or reason to reduce fractional reserve requirements; if banks had been holding their capital as currency or deposits in other institutions then the fractional reserve requirements would have been trivially met since the percentages were lower. As FTX showed, if most of your capital loses its value then you are insolvent. The banking system is just a little more insecure than it was with fractional reserves. I'm happy to be shown that I'm wrong, since I am not an expert.
    - Nursie 4y ago
      I’m not either! Just wanted to point out that the “zero reserves” thing is a bit more complex than purely what US banks are required to keep as cash in the reserve requirements). Further, from the announcement that lead to this, it seems that the reserve requirement is zero because the mechanisms have changed. The reserve requirements appear to have applied specifically to reserve accounts held centrally at the federal reserve. To me this looks very much like a ‘scare’ factoid that can be latched onto and shared in order to persuade people that the banking system is way more fragile than it is, and that it’s collapse is either imminent or inevitable. OMG zero reserves! Dig a bit deeper and that’s partially true and perhaps not all that important, and represents a technical change in operations rather than the massive risk increase it gets portrayed as.
imtringued 4y ago
In theory we could do 100% reserve banking with negative interest rates on cash and demand deposits but then "savers" will start complaining how it is draconian to get a certificate of deposit. It's an interesting double standard.

cortesoft 4y ago

The details of how the actual transactions occur might be different, but the general concept of fractional reserve banking is still “loaning out a portion of deposits” https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking

JamesianP 4y ago
It's more accurate to say they loan out a multiple of deposits based on the inverse of the fraction (the "money multiplier"). If someone puts 1 million in the bank and the fractional reserve is 20 percent, they can now create loans of up to 4 million. Such that the reserve is 20 percent of their total assets of 5 million (= 4 million loans + 1 million cash).
- qnt 4y ago
  Again no, neither of these are accurate. Modern banks do not operate on a fractional reserve basis at all. This is a falsehood peddled by well out of date undergrad econ textbooks https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
  - JamesianP 4y ago
    I'm describing what fractional reserve means. Technically that fraction has been set to zero very recently so it is trivial though still not false. This was discussed a lot elsewhere on this board.
    - lupire 4y ago
      If that you say is true then banks could lend infinite money to their friends and never collect it.
      - imtringued 4y ago
        Well, except the friend part the money supply has never shrunk so far.

baobabKoodaa 4y ago

No, when you take a loan out of a bank, the bank doesn't "create deposits" that it loans to you. The bank loans you existing deposits. The method by which banks end up creating money is less dramatic than you think. I wrote a long-form explainer here: https://www.attejuvonen.fi/money-out-of-thin-air/ https://www.attejuvonen.fi/money-out-of-thin-air/

qnt 4y ago
Not at all. When you get a loan, the bank creates a liability and deposit out of thin air. The deposit is a "demand deposit", which is effectively equivalent and fungible to central-bank-backed currency (hence the term "money" usually applies to both, though they are different things). The bank needs no existing customer deposits to create a demand deposit and liability in your account. You should run through your example again, except begin by creating a loan, rather than first beginning by a customer lending the bank a deposit. The BoE article linked above is absolutely correct.
- dools 4y ago
  Always good to find another MMTer out in the wild ;)
  - unmole 4y ago
    This has absolutely nothing to do with MMT.
    - dools 4y ago
      MMT economists have been instrumental in dispelling many of the popular misunderstandings about how banking works in addition to their work dispelling the many popular misunderstandings about how government finance works. But also qnt is clearly well versed in MMT which is what I was referring to.
- baobabKoodaa 4y ago
  You claim that the bank needs no existing customer deposits to create a demand deposit and liability in your account. This claim is true only in the pedantic sense: if the bank is otherwise capitalized (e.g. money from investors in the bank), then it could create loans using whatever money it has, as opposed to using money specifically from depositors. However, what you probably meant is that a bank could loan out money even if it has $0 money in the bank. This is not true at all. A bank can not loan out money if it has no money. It has no printing presses that print physical banknotes, and other banks would refuse electronic transfers from a bank which is known to have $0 money. Furthermore, it's not clear to me how you believe that the BoE article contradicts what I'm saying. I'm under the impression that you (along with most other people) are simply misunderstanding what you are reading here.