4 ms·

You’re creating a lot of confusion by ignoring cash accounting (the physical dollar I give a bank is then given to a homeowner as a mortgage) and talking about

by RC_ITR 4y ago

You’re creating a lot of confusion by ignoring cash accounting (the physical dollar I give a bank is then given to a homeowner as a mortgage) and talking about GAAP accounting, without making it clear that is what you are doing (the jargon only makes things worse). Like sure, it’s loan to capital ratio that matters but as you point out: > Bank runs are a liquidity problem because the bank's assets aren't all liquid enough to transfer out all the deposits the bank holds, This is because in practice the money you give to a bank is lent out, even if it’s technically leverage against capital.

rainjackets11 4y ago
Banks cannot and do not lend out deposits. Bank deposits are a liability of the bank, they do not have it in the first place to lend out. When the bank gives someone else a $500,000 mortgage, they just create the money out of nothing and increase the customer’s bank balance. This new $500,000 liability is balanced by the new loan asset. Almost all money is of this type rather than physical currency.
- RC_ITR 4y ago
  Ok so then by your logic, why do banks care about collecting deposits? Because they need a liability to offset their assets? Ok wildly backwards but sure. And wait, in your metaphor, where does the $500k asset of cash that a depositor gives a bank (which offsets that liability) go? It’s just fake in your mind?
  - rsj_hn 4y ago
    Some banks care about collecting deposits because the interest they earn on short term paper is more than the interest they pay on deposits. Some banks don't accept deposits at all -- these are called investment banks. Also, banks don't really do a lot of maturity transformation -- there are so many myths about how banks operate -- if you look at a bank's balance sheet, you will see a range of short, medium, and long term debt that is constructed to roughly match their short, medium, and long term assets. Rather, banks make money off of spreads, because banks have lower funding costs than their customers, due to a web of in house expertise, government guarantees, access to special lending facilities and payment networks that others can't access. If you want to really understand banks, you should stop talking about deposits, which aren't particularly important, and instead focus on mortgages, which dominate the entire financial industry. If you want to buy a house, you could try to sell a bond into the bond market. But a household will have a hard time selling a bond. So they go to a bank, which performs its own credit analysis and then gives you a loan while they sell a bond. The interest you pay to the bank is more than the interest the bank pays on the bond. Banks make money off of this spread, which is small, but it is leveraged, so the total return on capital for the bank is high. If you don't like it, you are welcome to try to fund your house purchase by selling your own bonds for a lower rate than what the bank charges you. Try crowdfunding your house purchase and skip the bank! Doing that will be an educational exercise that will clarify how banks make money -- it has nothing to do with funny business about deposits, and everything to do with banks having access to capital markets that the Smith household does not. Most banks basically just break even on the deposits, given the costs of owning all those branches, paying the tellers, etc. Even if they make a profit, it's a small profit, but it's a great way to upsell other financial services (mortgages, auto loans, lines of credit) that make money for the bank, as well as charging fees, etc. But they don't need your deposit in order lend someone else money, because they borrow from the capital markets at one rate, and lend at a higher rate, and this has nothing to do with borrowing short term and lending long term. Rather, the primary risk for banks comes from leverage.
    - RC_ITR 4y ago
      >Some banks care about collecting deposits because the interest they earn on short term paper is more than the interest they pay on deposits. Some banks don't accept deposits at all -- these are called investment banks. LMFAO. I want to go to Goldman Sachs's Balance sheet and then tell me how much they have in deposits ($394 billion!!!). I want you to go to Morgan Stanley's and tell me the same ($338 billion!!!). Nearly all banks use deposits as an easy source of capital that they then invest/lend out. You are confusing retail deposits with deposits. Like sure, there's boutiques like Qatalyst and Allen that limit their deposit base for one reason or another, but they are marginal in scale vs. real investment banks. >If you want to really understand banks, you should stop talking about deposits, which aren't particularly important, and instead focus on mortgages, which dominate the entire financial industry. This is such a wild conversation! I am talking about mortgages, which are funded by deposits! >But they don't need your deposit in order lend someone else money, because they borrow from the capital markets at one rate, and lend at a higher rate, and this has nothing to do with borrowing short term and lending long term. Rather, the primary risk for banks comes from leverage. Yes we agree! And one form of extremely cheap borrowing is taking deposits! That's why they pay interest on it! It's borrowing! It's a liability on the balance sheet! How is this not clicking for you?!?!?!
  - rainjackets11 4y ago
    That’s a good a question, understanding why banks want deposits was hard for me to understand in this model. My current understanding is that taking deposits is a cheap source of funding for the bank. They could borrow required reserves from elsewhere but it’s cheaper to take it from customers who accept low interest rates. For the second part, I agree that if you bring $500k cash to your bank and deposit it, then that asset is real and it basically goes into the bank vault. But that is not the typical case. Most deposits do not come from putting cash in the bank (after all, the amount of cash/central bank reserves is much smaller than the amount of bank deposits). Most of them are just an IOU from the bank and we use these IOUs as the most frequent form of money.
    - RC_ITR 4y ago
      >My current understanding is that taking deposits is a cheap source of funding for the bank. They could borrow required reserves from elsewhere but it’s cheaper to take it from customers who accept low interest rates. Yeah, why it's confusing to you is that you're segregating "borrowing from capital markets" from "borrowing from depositors" when they are effectively the same thing (both are interest-bearing liabilities). >For the second part, I agree that if you bring $500k cash to your bank and deposit it, then that asset is real and it basically goes into the bank vault. I suggest you google 'fractional reserves,' because no, the money does not go into a bank vault (though some of it does!). > Most of them are just an IOU from the bank and we use these IOUs as the most frequent form of money. The logical fallacy here is that you're seeing how many IOUs there are (many) and how many cash dollars there are (much fewer!) and then assume that IOUs don't have to be attached to a physical dollar but they do (keep in mind, a physical dollar could just be a line item on The Treasury's balance sheet, it doesn't have to be paper) It's just that many IOUs can be attached to the same dollar through the credit multiplier.
stephen_g 4y ago
But there aren't dollars given to banks mostly. Cash is a tiny fraction of the money banks handle. Most of the payment volume is millions of electronics messages between banks to debit and credit numbers in people's accounts, and only at certain times of the day the net of that (a far, far smaller amount of reserves) are actually moved. It's actually the other way around - trying to follow a physical dollar just makes you confused, because all the actual business of the bank is happening in accounting-land (the bank's balance sheets and electronic records of customer accounts).
- ravel-bar-foo 4y ago
  You are splitting hairs where it doesn't matter. More alarmingly, by your reasoning the bank is not lending out cash either, so there is no value in considering 'cashflow' at all. But in practice when people say they 'pay cash' for something large like a house or a car, they are usually effecting a bank transfer (well, in Korea at least). I understand that under the hood in the US this is an IOU between banks, but to the depositor there is no difference whether the money is cash or bits. What matters is whether the bank has the liquidity to provide upon request.
- RC_ITR 4y ago
  Then by your logic, shouldn’t banks not want customer deposits? Isn’t it just burdensome overhead? Trust me, I get that people aren’t Fedexing cash envelopes between banks, but that doesn’t mean money is fake and banks can invent it out of think air (they can only multiply it) And to be clear, again, you can very easily follow physical dollars at banks (otherwise imagine the fraud that could happen!), it’s just circular so multipliers get applied. Like I get it’s complicated, but my deposit goes into a mortgage that then goes into another account, etc etc etc. that’s called the “credit multiplier” and we can definitely track it.

by RC_ITR 4y ago

rainjackets11 4y ago

Banks cannot and do not lend out deposits. Bank deposits are a liability of the bank, they do not have it in the first place to lend out. When the bank gives someone else a $500,000 mortgage, they just create the money out of nothing and increase the customer’s bank balance. This new $500,000 liability is balanced by the new loan asset. Almost all money is of this type rather than physical currency.

RC_ITR 4y ago
Ok so then by your logic, why do banks care about collecting deposits? Because they need a liability to offset their assets? Ok wildly backwards but sure. And wait, in your metaphor, where does the $500k asset of cash that a depositor gives a bank (which offsets that liability) go? It’s just fake in your mind?
- rsj_hn 4y ago
  Some banks care about collecting deposits because the interest they earn on short term paper is more than the interest they pay on deposits. Some banks don't accept deposits at all -- these are called investment banks. Also, banks don't really do a lot of maturity transformation -- there are so many myths about how banks operate -- if you look at a bank's balance sheet, you will see a range of short, medium, and long term debt that is constructed to roughly match their short, medium, and long term assets. Rather, banks make money off of spreads, because banks have lower funding costs than their customers, due to a web of in house expertise, government guarantees, access to special lending facilities and payment networks that others can't access. If you want to really understand banks, you should stop talking about deposits, which aren't particularly important, and instead focus on mortgages, which dominate the entire financial industry. If you want to buy a house, you could try to sell a bond into the bond market. But a household will have a hard time selling a bond. So they go to a bank, which performs its own credit analysis and then gives you a loan while they sell a bond. The interest you pay to the bank is more than the interest the bank pays on the bond. Banks make money off of this spread, which is small, but it is leveraged, so the total return on capital for the bank is high. If you don't like it, you are welcome to try to fund your house purchase by selling your own bonds for a lower rate than what the bank charges you. Try crowdfunding your house purchase and skip the bank! Doing that will be an educational exercise that will clarify how banks make money -- it has nothing to do with funny business about deposits, and everything to do with banks having access to capital markets that the Smith household does not. Most banks basically just break even on the deposits, given the costs of owning all those branches, paying the tellers, etc. Even if they make a profit, it's a small profit, but it's a great way to upsell other financial services (mortgages, auto loans, lines of credit) that make money for the bank, as well as charging fees, etc. But they don't need your deposit in order lend someone else money, because they borrow from the capital markets at one rate, and lend at a higher rate, and this has nothing to do with borrowing short term and lending long term. Rather, the primary risk for banks comes from leverage.
  - RC_ITR 4y ago
    >Some banks care about collecting deposits because the interest they earn on short term paper is more than the interest they pay on deposits. Some banks don't accept deposits at all -- these are called investment banks. LMFAO. I want to go to Goldman Sachs's Balance sheet and then tell me how much they have in deposits ($394 billion!!!). I want you to go to Morgan Stanley's and tell me the same ($338 billion!!!). Nearly all banks use deposits as an easy source of capital that they then invest/lend out. You are confusing retail deposits with deposits. Like sure, there's boutiques like Qatalyst and Allen that limit their deposit base for one reason or another, but they are marginal in scale vs. real investment banks. >If you want to really understand banks, you should stop talking about deposits, which aren't particularly important, and instead focus on mortgages, which dominate the entire financial industry. This is such a wild conversation! I am talking about mortgages, which are funded by deposits! >But they don't need your deposit in order lend someone else money, because they borrow from the capital markets at one rate, and lend at a higher rate, and this has nothing to do with borrowing short term and lending long term. Rather, the primary risk for banks comes from leverage. Yes we agree! And one form of extremely cheap borrowing is taking deposits! That's why they pay interest on it! It's borrowing! It's a liability on the balance sheet! How is this not clicking for you?!?!?!
- rainjackets11 4y ago
  That’s a good a question, understanding why banks want deposits was hard for me to understand in this model. My current understanding is that taking deposits is a cheap source of funding for the bank. They could borrow required reserves from elsewhere but it’s cheaper to take it from customers who accept low interest rates. For the second part, I agree that if you bring $500k cash to your bank and deposit it, then that asset is real and it basically goes into the bank vault. But that is not the typical case. Most deposits do not come from putting cash in the bank (after all, the amount of cash/central bank reserves is much smaller than the amount of bank deposits). Most of them are just an IOU from the bank and we use these IOUs as the most frequent form of money.
  - RC_ITR 4y ago
    >My current understanding is that taking deposits is a cheap source of funding for the bank. They could borrow required reserves from elsewhere but it’s cheaper to take it from customers who accept low interest rates. Yeah, why it's confusing to you is that you're segregating "borrowing from capital markets" from "borrowing from depositors" when they are effectively the same thing (both are interest-bearing liabilities). >For the second part, I agree that if you bring $500k cash to your bank and deposit it, then that asset is real and it basically goes into the bank vault. I suggest you google 'fractional reserves,' because no, the money does not go into a bank vault (though some of it does!). > Most of them are just an IOU from the bank and we use these IOUs as the most frequent form of money. The logical fallacy here is that you're seeing how many IOUs there are (many) and how many cash dollars there are (much fewer!) and then assume that IOUs don't have to be attached to a physical dollar but they do (keep in mind, a physical dollar could just be a line item on The Treasury's balance sheet, it doesn't have to be paper) It's just that many IOUs can be attached to the same dollar through the credit multiplier.

stephen_g 4y ago

But there aren't dollars given to banks mostly. Cash is a tiny fraction of the money banks handle. Most of the payment volume is millions of electronics messages between banks to debit and credit numbers in people's accounts, and only at certain times of the day the net of that (a far, far smaller amount of reserves) are actually moved. It's actually the other way around - trying to follow a physical dollar just makes you confused, because all the actual business of the bank is happening in accounting-land (the bank's balance sheets and electronic records of customer accounts).

ravel-bar-foo 4y ago
You are splitting hairs where it doesn't matter. More alarmingly, by your reasoning the bank is not lending out cash either, so there is no value in considering 'cashflow' at all. But in practice when people say they 'pay cash' for something large like a house or a car, they are usually effecting a bank transfer (well, in Korea at least). I understand that under the hood in the US this is an IOU between banks, but to the depositor there is no difference whether the money is cash or bits. What matters is whether the bank has the liquidity to provide upon request.
RC_ITR 4y ago
Then by your logic, shouldn’t banks not want customer deposits? Isn’t it just burdensome overhead? Trust me, I get that people aren’t Fedexing cash envelopes between banks, but that doesn’t mean money is fake and banks can invent it out of think air (they can only multiply it) And to be clear, again, you can very easily follow physical dollars at banks (otherwise imagine the fraud that could happen!), it’s just circular so multipliers get applied. Like I get it’s complicated, but my deposit goes into a mortgage that then goes into another account, etc etc etc. that’s called the “credit multiplier” and we can definitely track it.