4 ms·

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

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