7 ms·

>fundamentally the incorrect claim that banks lend out their depositors funds Not sure what you mean by "fundamentally incorrect"? If your bank only has $100 i

by Aunche 4y ago

>fundamentally the incorrect claim that banks lend out their depositors funds Not sure what you mean by "fundamentally incorrect"? If your bank only has $100 in deposits, you simply can't loan out $101. The money multiplier effect occurs because the lent out money is deposited at another bank rather than stuffed under a mattress.

upsidesinclude 4y ago
This is most assuredly incorrect. Banks lend at certain multiples of assets, 10:1. Money creation takes place here, not as imagined at the treasury.
- kasey_junk 4y ago
  Loans are assets for the bank. The typical ratio people talk about here loan:deposit. Bank investors get spooked if that goes over about .8 currently. Prior to 2008 it was closer to .9 but the financial crisis caused people to be more risk adverse. A ratio over 1 implies a bank is lacking liquidity. A 10:1 loan:deposit ratio would be real bad. The industry overall during the pandemic was sitting at around .6, which is one of the reasons the Fed removed the reserve requirement. They wanted to stimulate lending. LTD is not typically part of regulatory control (though in the US there are certain controls to make sure no bank gets too big that benchmark to it). Rather its enforced by the market, because equity holders demand it, because they have lower debt precedence than depositors. Bank assets(loans, investments, cash, etc):liabilities (deposits, borrowed money, trading losses, foreign bank holdings, etc) requirements are covered by capital regulations. A bank with less than 1 a:l would be considered insolvent and depending on the regulatory regime they are part of, might be forcibly put into receivership. Banks create money through lending, not because they are lending more than they are taking in, but because to the person being lent to, they now have more money. They have both their deposit, and the loan which can be put into circulation now. But they have a corresponding liability to the bank that must be paid over time.
  - upsidesinclude 4y ago
    This must be wildly different between the US and the UK, a difference of which I was unaware. At least you have that going for you
    - kasey_junk 4y ago
      I don’t know how to look up the stats with the Bank of England as well as I do the Fed to check, but here is a report[0] from the pandemic from S&P that suggests at least for the big banks in the UK there isn’t much difference. Santander and Lloyds are a little higher than you’d see in the big banks in the US at 1.1 Loan:Deposit but NatWest, HSBC, Barclays, and Standard Chartered all sit in the .6-.9 range which is where banks in the US typically like to be. Maybe your small banks and credit unions operate dramatically differently than your big banks but that would be surprising. It would also be surprising because the Basel accords make it pretty tough to meet your credit and market risk requirements without using deposits to fund loans. [0] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/uk-banks-deposits-rise-amid-pandemic-but-margins-likely-to-be-squeezed-62177809 https://www.spglobal.com/marketintelligence/en/news-insights...
- ahtihn 4y ago
  > Banks lend at certain multiples of assets, 10:1. No this is wrong. They can not loan out more than total deposits. The trick is that if you deposit 100, they can loan out 90. It gets deposited with them, so they can loan out another 80 and so on. (Actual numbers may differ). This is how you get the 10x multiplier. But they can not loan out more than total deposits. If they could, why even bother with deposits at all?
  - kasey_junk 4y ago
    They absolutely _can_ lend out more than they take in. They tend not to because their owners are risk adverse and depositors get precedence in receivership. But you can find banks with 6 or 7 to 1 LTD (I’d not want to be invested in one). You bother with deposits for a few reasons a) banks get a lot of power assuming they’ll play a public good in the form of managing deposits and b) they can earn more using the deposits than they have to pay out to depositors.
  - junofan 4y ago
    Nope. Pretend I’m a bank with no assets and no debt, and I give you a loan for $100. I then have $100 in assets and $100 in liabilities. When you withdraw the $100 loan, I borrow from another bank or from the central bank, and give you that money. I collect deposits because it’s a cheap source of liquidity.
    - deleted 4y ago
      [deleted]
    - kasey_junk 4y ago
      Critically, your asset is the loan, the liability is the deposit credit in the borrowers account but you have zero liquidity and are actually done for when they ask for the money. So you either need to borrow the money from another entity (if perhaps you were better at loan origination) ahead of that, or more likely use owner equity to payout the loan.
      - neffy 4y ago
JumpCrisscross 4y ago
> bank only has $100 in deposits, you simply can't loan out $101 Of course it can. It creates the loan. Capital requirements dictate it must borrow some amount at the end of the day. But when Chase lends you money, it’s literally just increasing numbers in your account.
- Aunche 4y ago
  No it can't unless if it instantly wants to be insolvent when you withdraw $101. The bank can make 101 $1$ loans because it can be confident that the all the debtors won't withdraw their money all at once. Edit: I realize now that I forgot to specify that I meant a single $101 loan in my original comment.
  - JumpCrisscross 4y ago
    > it can't unless if it instantly wants to be insolvent when you withdraw $101 No. This is the fundamental misconception alluded to earlier. A bank with $100 of assets and $100 of liabilities can made a $50 loan and wind up with $150 of assets and $150 of liabilities. Deposits are a bank's liability. Every fractional-reserve bank is insolvent in the short run. (This is inherent to leverage.) More realistic: a 10% reserve requirement. Bank has $100 of assets, of which $10 are reserves, and $98 of liabilities. ($2 equity.) Customer wants to borrow $20. Can the bank make the loan? The answer is yes. It winds up with $120 of assets including $10 of reserves, a deficiency. So it borrows $2 in the interbank markets and winds up with $12 of reserves against $120 of assets. Note that the liability side doesn't even come into play: that's a capital-requirement question, where defining what counts as an asset to what degree is a tomes-thick discussion [1]. That's why we have reserve and capital requirements. Leveraged banking doesn't work without supervision. Because can’t and shouldn’t aren’t naturally enforced. [1] https://en.wikipedia.org/wiki/Basel_Accords https://en.wikipedia.org/wiki/Basel_Accords
    - ryandrake 4y ago
      From my reading of this[1], the 10:1 ratio is no longer required in the USA. The Fed dropped the reserve requirements to zero, so banks can simply loan infinitely without any actual reserve. 1: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
globular-toast 4y ago
> If your bank only has $100 in deposits, you simply can't loan out $101. Why not? I think the assumption here is that money is like a physical commodity. If we were talking about apples then of course your statement would be correct. But we're not. When a bank "lends" you $100 it just creates two entries: one in your current account that says +$100 and one in your loan account that says -$100. The latter is called a liability. There is nothing physical. In fact, the only thing that "exists" are the entries in the ledger. The money is completely abstract and appears only between the time the loan was created and the loan being paid back.

by Aunche 4y ago

upsidesinclude 4y ago

This is most assuredly incorrect. Banks lend at certain multiples of assets, 10:1. Money creation takes place here, not as imagined at the treasury.

kasey_junk 4y ago
Loans are assets for the bank. The typical ratio people talk about here loan:deposit. Bank investors get spooked if that goes over about .8 currently. Prior to 2008 it was closer to .9 but the financial crisis caused people to be more risk adverse. A ratio over 1 implies a bank is lacking liquidity. A 10:1 loan:deposit ratio would be real bad. The industry overall during the pandemic was sitting at around .6, which is one of the reasons the Fed removed the reserve requirement. They wanted to stimulate lending. LTD is not typically part of regulatory control (though in the US there are certain controls to make sure no bank gets too big that benchmark to it). Rather its enforced by the market, because equity holders demand it, because they have lower debt precedence than depositors. Bank assets(loans, investments, cash, etc):liabilities (deposits, borrowed money, trading losses, foreign bank holdings, etc) requirements are covered by capital regulations. A bank with less than 1 a:l would be considered insolvent and depending on the regulatory regime they are part of, might be forcibly put into receivership. Banks create money through lending, not because they are lending more than they are taking in, but because to the person being lent to, they now have more money. They have both their deposit, and the loan which can be put into circulation now. But they have a corresponding liability to the bank that must be paid over time.
- upsidesinclude 4y ago
  This must be wildly different between the US and the UK, a difference of which I was unaware. At least you have that going for you
  - kasey_junk 4y ago
    I don’t know how to look up the stats with the Bank of England as well as I do the Fed to check, but here is a report[0] from the pandemic from S&P that suggests at least for the big banks in the UK there isn’t much difference. Santander and Lloyds are a little higher than you’d see in the big banks in the US at 1.1 Loan:Deposit but NatWest, HSBC, Barclays, and Standard Chartered all sit in the .6-.9 range which is where banks in the US typically like to be. Maybe your small banks and credit unions operate dramatically differently than your big banks but that would be surprising. It would also be surprising because the Basel accords make it pretty tough to meet your credit and market risk requirements without using deposits to fund loans. [0] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/uk-banks-deposits-rise-amid-pandemic-but-margins-likely-to-be-squeezed-62177809 https://www.spglobal.com/marketintelligence/en/news-insights...
ahtihn 4y ago
> Banks lend at certain multiples of assets, 10:1. No this is wrong. They can not loan out more than total deposits. The trick is that if you deposit 100, they can loan out 90. It gets deposited with them, so they can loan out another 80 and so on. (Actual numbers may differ). This is how you get the 10x multiplier. But they can not loan out more than total deposits. If they could, why even bother with deposits at all?
- kasey_junk 4y ago
  They absolutely _can_ lend out more than they take in. They tend not to because their owners are risk adverse and depositors get precedence in receivership. But you can find banks with 6 or 7 to 1 LTD (I’d not want to be invested in one). You bother with deposits for a few reasons a) banks get a lot of power assuming they’ll play a public good in the form of managing deposits and b) they can earn more using the deposits than they have to pay out to depositors.
- junofan 4y ago
  Nope. Pretend I’m a bank with no assets and no debt, and I give you a loan for $100. I then have $100 in assets and $100 in liabilities. When you withdraw the $100 loan, I borrow from another bank or from the central bank, and give you that money. I collect deposits because it’s a cheap source of liquidity.
  - deleted 4y ago
    [deleted]
  - kasey_junk 4y ago
    Critically, your asset is the loan, the liability is the deposit credit in the borrowers account but you have zero liquidity and are actually done for when they ask for the money. So you either need to borrow the money from another entity (if perhaps you were better at loan origination) ahead of that, or more likely use owner equity to payout the loan.
    - neffy 4y ago

JumpCrisscross 4y ago

> bank only has $100 in deposits, you simply can't loan out $101 Of course it can. It creates the loan. Capital requirements dictate it must borrow some amount at the end of the day. But when Chase lends you money, it’s literally just increasing numbers in your account.

Aunche 4y ago
No it can't unless if it instantly wants to be insolvent when you withdraw $101. The bank can make 101 $1$ loans because it can be confident that the all the debtors won't withdraw their money all at once. Edit: I realize now that I forgot to specify that I meant a single $101 loan in my original comment.
- JumpCrisscross 4y ago
  > it can't unless if it instantly wants to be insolvent when you withdraw $101 No. This is the fundamental misconception alluded to earlier. A bank with $100 of assets and $100 of liabilities can made a $50 loan and wind up with $150 of assets and $150 of liabilities. Deposits are a bank's liability. Every fractional-reserve bank is insolvent in the short run. (This is inherent to leverage.) More realistic: a 10% reserve requirement. Bank has $100 of assets, of which $10 are reserves, and $98 of liabilities. ($2 equity.) Customer wants to borrow $20. Can the bank make the loan? The answer is yes. It winds up with $120 of assets including $10 of reserves, a deficiency. So it borrows $2 in the interbank markets and winds up with $12 of reserves against $120 of assets. Note that the liability side doesn't even come into play: that's a capital-requirement question, where defining what counts as an asset to what degree is a tomes-thick discussion [1]. That's why we have reserve and capital requirements. Leveraged banking doesn't work without supervision. Because can’t and shouldn’t aren’t naturally enforced. [1] https://en.wikipedia.org/wiki/Basel_Accords https://en.wikipedia.org/wiki/Basel_Accords
  - ryandrake 4y ago
    From my reading of this[1], the 10:1 ratio is no longer required in the USA. The Fed dropped the reserve requirements to zero, so banks can simply loan infinitely without any actual reserve. 1: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm

globular-toast 4y ago

> If your bank only has $100 in deposits, you simply can't loan out $101. Why not? I think the assumption here is that money is like a physical commodity. If we were talking about apples then of course your statement would be correct. But we're not. When a bank "lends" you $100 it just creates two entries: one in your current account that says +$100 and one in your loan account that says -$100. The latter is called a liability. There is nothing physical. In fact, the only thing that "exists" are the entries in the ledger. The money is completely abstract and appears only between the time the loan was created and the loan being paid back.