9 ms·

To my mind, although it's in-principle equivalent, the clearer way to think about this is that banks borrow money from depositors and lend that money via loans

To my mind, although it's in-principle equivalent, the clearer way to think about this is that banks borrow money from depositors and lend that money via loans or investments. The primary business of a bank is borrowing short and lending long - where short and long refer to the holding time: i.e. taking demand or short-duration term deposits and making mortgage, car and other types of loans. If you do this badly, you can lose money due to duration risk (you might end up paying more on your demand deposits than your mortgage book is bringing in), but you also have liquidity risks because your depositors can ask for those deposits back faster than you unwind your lending. If you have both of these occurring at the same time, you're then in severe difficulty, because the only way to repay your depositors is by borrowing money ... which is going to be harder if you look unprofitable ... and that very borrowing can exacerbate the perception of a bank in trouble. That's basically what happened here.

andrepd 4y ago
> banks borrow money from depositors and lend that money via loans or investments. Do they? Reserve requirements are almost non-existent. A better way to put it is that banks pretty much have a state-granted privilege for creating money and in the form of loans.
- blackoil 4y ago
  Can you elaborate this. Is it possible for a regular bank to lend money it does not have?
  - whatshisface 4y ago
    They're allowed to borrow from the federal reserve which is allowed to lend an infinite amount.
    - acjohnson55 4y ago
      Banks aren't allowed to borrow infinite amounts of money from the Fed. If they could SVB would still be ticking.
    - deleted 4y ago
      [deleted]
    - runlaszlorun 4y ago
      They can borrow easily but it’s still a liability, right? I think people here the borrowing part and don’t know the liability part.
    - SideQuark 4y ago
      They borrow and repay with interest, so the don't borrow unless they have some use for the money that will return value to the borrower, and some profit to the bank, in order to repay the loan the bank got.
  - throw0101c 4y ago
    > Is it possible for a regular bank to lend money it does not have? Banks create money from nothing to lend out: > Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account. > This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth. * https://www.bankofengland.co.uk/explainers/how-is-money-created https://www.bankofengland.co.uk/explainers/how-is-money-crea... > This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’. * 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... Money is a psychological construct of humans to facilitate trade and the exchange of goods and services. Some societies don't (didn't) even have money/currency: everyone kept a mental 'tally' of who gave or took things, and there were social expectations of giving "gifts" for repayment. Physical tokens (bones, shells, gold, paper, etc) came later.
  - trifurcate 4y ago
    That's not what GP is saying. When reserve requirements are low, banks are essentially no longer forbidden from lending out other customers' deposits. When you decrease the reserve requirement, you're unlocking reserves that were previously locked up to back your deposits so that they can be loaned out to other customers, who will then promptly either directly or indirectly end up depositing their loaned amount into the banking system again, where the part that remains after the reserve requirement once again gets loaned out, deposited back in, etc. In effect, because you're making this money go around, you're increasing the total supply of money, because these deposits are the money supply, and there can and often is more than a $1 net increase in overall deposits for each $1 deposited with a bank. Another way to state it is like so: you deposit $1, bank loans out $0.90, someone else deposits that $0.90, their bank loans out $0.81, so on and so forth for $10 of net deposit generation for a $1 initial deposit at 10% reserves held. Of course, individual banks can elect to lock up more reserves than necessary, which would negate this effect.
  - stephen_g 4y ago
    The posts above are incorrect about how banks work, but your question is spot on. Actually, banks always lend out money they don’t have - they can’t actually “lend deposits”. The risk of what banks do is why banking licenses are hard to get and it’s so regulated. This primer from the Bank of England is very clear: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- acjohnson55 4y ago
  Sure, but they don't have unlimited ability to make loans. They are subject to complex balance sheet constraints. And it's cheaper to borrow money from depositors than the Fed.
- SideQuark 4y ago
  > Reserve requirements are almost non-existent. This says otherwise. https://fred.stlouisfed.org/series/TOTRESNS https://fred.stlouisfed.org/series/TOTRESNS Lots more real evidence here https://fred.stlouisfed.org/categories/123 https://fred.stlouisfed.org/categories/123
  - throw0101c 4y ago
    > This says otherwise. And in Canada, Australia, etc, they are zero: * https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
    - Nursie 4y ago
      Indeed, in these countries the banks have capital requirements, which they also do in the US, instead.
  - throwaway742 4y ago
    https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
  - gilbetron 4y ago
    Those are reserves, not reserve requirements (which are noted as "discontinued" in the first link). To quote this: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm "As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."
    - SideQuark 4y ago
      Read more - the reason is the "ample reserves" regime, where, as I showed, reserves are vastly higher than usual. This is because the Fed has transitioned to a better method to handle what used to be called the reserve requirement. The new (and as the above data demonstrated) is higher actual reserves. This is done via changes in mechanisms, described in the FAQ. It's not like banks suddenly loan out all the money. The Fed page has a FAQ and you can look up related papers. From the FAQ: "For many years, reserve requirements played a central role in the implementation of monetary policy by creating a stable demand for reserves. In January 2019, the FOMC announced its intention to implement monetary policy in an ample reserves regime. Reserve requirements do not play a significant role in this operating framework." People see the change, which is a good move for good reasons, and flip out, just like goldbug times or when CPI get adjusted and so on. A simple way to look at it for a long time there has been a idea battle between what's called endogenous and exogenous money creation (somewhat overview of the debate [1]), and over the past 50 years, most central banking systems have evolved as market needs evolved, to allow banks to lend beyond reserve requirements as long as they soon replenish, which was done via overnight lending windows through central banks. The practical effect is there has not been a "reserve requirement" except in name only for decades. Banks can lend whatever they want, and only have to borrow back to the old requirement which is simply an inefficiency. This is summed up in one sentence on the Wikipedia article on reserve requirements as "Under this view, reserves therefore impose no constraints, as the deposit multiplier is simply, in the words of Kydland and Prescott (1990), a myth" [2] Under the new system, the Fed changed other rates to account for this bookkeeping trick, with the same net effect on the banking system, but under simpler and more transparent accounting. They're not idiots. So, since this was the reality of banking, the FED changed how things are tallied. Just like when CPI changed some terms to handle changes in reality, changes that were well documented, for good reason, people not reading carefully got upset and were sure they got cheated somehow. So setting the old rate to zero and adopting the new methods for monetary control are the same pattern: terms change, in practice things are actually better off, but people used to the old term are upset and mischaracterize it as some a sign of financial calamity or underhandedness. It's not. When people dig this out during an unrelated bank issue as some smoking gun it's worth stopping the nonsense in it's tracks in the same vein as COVID or climate or goldbug nonsense. [1] https://www.sciencedirect.com/science/article/pii/S1090944319303606 https://www.sciencedirect.com/science/article/pii/S109094431... [2] https://en.wikipedia.org/wiki/Reserve_requirement https://en.wikipedia.org/wiki/Reserve_requirement
- NovemberWhiskey 4y ago
  People read “reserve requirements have gone to zero” (which is true) and assume it is so that banks can keep lower reserves. In fact, reserve requirements became meaningless because banks had (and continue to have) so much more in reserves than they were ever required to have under the prior system.
  - hgomersall 4y ago
    And they can get reserves whenever they need to, because that's how the interest rate policy is effected.
  - ric2b 4y ago
    I don't understand this, could you clarify? If they have so much more money than the requirements demand, what is the point of lowering the requirements? Who does it help?
    - NovemberWhiskey 4y ago
      The point wasn’t that reserve requirements were “lowered”; they were removed - because the Fed moved to a different mechanism to set short-term interest rates. If banks choose to keep lots of reserves (because you’re paying interest on them), it’s hard to change the willingness of banks to lend by changing the reserve requirement, right? In economic terms, the supply of reserves is meeting the demand curve for reserves in an inelastic region. So the Fed decided to announce a new approach; the so-called “ample reserves regime” where short term interest rate control would be achieved by administered rates rather than by the reserve requirements of the “limited reserves regime” that went before. If this sounds very far from the quotidian business of deposit taking and loan making: that’s because it is.
- seanhunter 4y ago
  I hear this a lot and it's in a lot of "explainer" videos on youtube and so on. The idea that banks have a special state-sponsored privilege to create credit is completely and very obviously untrue. Try this thought experiment. You and I are in a bar. We order drinks but oh no the bar's card machine is down and you don't have cash. No problem I'll lend you a tenner. 1) Am I a bank? 2) Did I first contact the state to check it was ok to create money in the form of a loan to you? I go back to the bar on another day on my own. Oh no! Their card machine is down again! This time I don't have cash on me. No problem the barman sees me all the time I can have the drink this time and pay up when I next get there and either have cash or their card machine is working. 3) Are they a bank? 4) Did they first contact the state to check it was ok to create money in the form of a loan to me? The answer to all these questions is obviously no. Credit is created throughout the economy at all levels and it is not a special function perculiar to banks.
  - swottler 4y ago
    You are talking about credit, not money. Banks create actual state-backed money, which can be physically (or more likely electronically) paid to a third party after they've loaned it to you. A better example would be if you were in the bar alone, and had no money, and instead just wrote an IOU on a bit of paper with your contact details. If we lived in a mythical 100% trustful utopia, then the barman would just accept this as money and so would anyone else in future who the barman needed to pay for anything. But we obviously don't live in such a society so unfortunately no, not anyone can just create money!
    - seanhunter 4y ago
      Banks don't create state-backed money either. The central bank creates money and gets it into the financial system by performing open market activities (eg buying treasuries with it) or depositing it into the accounts it holds with various banks.
      - Kiro 4y ago
        No, the banks create money. If you've watched all these explainer videos surely you must understand basic FRB.
- m101 4y ago
  Not how it works. How it works is that there are a number of constraints and metrics placed on banks that they need to satisfy and prevent them taking risk. At any time it could be any one of these that is the limiting factor on risk. It may not be a measure of "reserves" that is the constraint.
markmaglana 4y ago
I wonder if it’s correct to also think about it in this way: idle cash devalues over time. Coupled with interest (no matter how small) that they pay out to their depositors, this exposes banks to future liability. To counter that, they have to give “jobs” to as much of this cash as possible so that they can make those payments while also pocketing a profit for themselves.
- q7xvh97o2pDhNrh 4y ago
  This is indeed a reasonable way to think about it. A dollar tomorrow is worth less than a dollar today. You might enjoy this light reading: https://www.investopedia.com/terms/n/npv.asp https://www.investopedia.com/terms/n/npv.asp
  - startupsfail 4y ago
    There are plenty of instruments though with different maturity dates, from a single day to decades. There is no reason to lock money in 10 year notes, it can stay as cash or go to money market or short term obligations.
    - a1445c8b 4y ago
      Too much idle cash is a wasted asset. As for money markets, don’t those get invested in treasury bills/notes anyway? Why go through a “middleman” when one has enough volume to invest directly? Short-term obligations may not provide the yield that their financial structure requires. 10-year notes, in certain situations, provide an optimal combo of yield and risk. Provided, of course, that nothing major happens to the economy which wasn’t the case here. Then again, who’s good at predicting that? In the end, it seemed like, given what was true at the time the decision was made, SVB made a rational choice.
      - howeyc 4y ago
        > As for money markets, don’t those get invested in treasury bills/notes anyway Yeah, but the market price basically stays at $1 and whenever they "break the buck" it's a huge deal. 10 year loans "break the buck" so often that it's extremely strange SVB didn't do anything about it. Basically they should have invested in securities that were safer and fluctuated less, but they got greedy chasing yield and got found out.
stephen_g 4y ago
That’s not how it works. This is a good primer by the Bank of England: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... Bank lending always creates new money. They don’t (and can’t) “lend deposits”.
- unyttigfjelltol 4y ago
  Maybe, but in the case of SVB, deposit amounts were suspiciously similar to assets.... The BOE is simply pointing out in the link that they are the only proper bank in the UK. All the others borrow from the BOE to make loans. Commercial banks don't "create" money any more than the BOE "borrows" it from elsewhere.... The BOE creates money and lends it to commercial banks who put up a deposit and make a reasonable case for credit.
- NovemberWhiskey 4y ago
  OK, sure. It’s a distinction without a difference though. If you read pg. 5 of that document, it explains how the effect of market forces results in essentially the same net effect for an individual bank as if they did “lend deposits”. This, plus the other effects (like what the BoE calls “prudential regulation”) are the reason why you don’t see banks with zero deposits and a trillion pounds of loans. Credit vs quantity theory of money is basically a concern of monetary policy (like: what is the expected effect of quantitative easing?) and doesn’t really bear on decisions at the level of individual banks or borrowers: things look consistent with both theories. Like: it doesn’t matter whether classical or relativistic mechanics are “true” if you’re only following the flight of a baseball.
- HDThoreaun 4y ago
  Of course banks are lending deposits. They're throwing in some investor money too but vast majority of loans they write is using deposits. You can try to make some sort of "number on screen go up" argument, btu the underlying value comes from somewhere. When someone takes a loan and withdraws dollars they're usually getting money that was deposited by a customer.

andrepd 4y ago

> banks borrow money from depositors and lend that money via loans or investments. Do they? Reserve requirements are almost non-existent. A better way to put it is that banks pretty much have a state-granted privilege for creating money and in the form of loans.

blackoil 4y ago
Can you elaborate this. Is it possible for a regular bank to lend money it does not have?
- whatshisface 4y ago
  They're allowed to borrow from the federal reserve which is allowed to lend an infinite amount.
  - acjohnson55 4y ago
    Banks aren't allowed to borrow infinite amounts of money from the Fed. If they could SVB would still be ticking.
  - deleted 4y ago
    [deleted]
  - runlaszlorun 4y ago
    They can borrow easily but it’s still a liability, right? I think people here the borrowing part and don’t know the liability part.
  - SideQuark 4y ago
    They borrow and repay with interest, so the don't borrow unless they have some use for the money that will return value to the borrower, and some profit to the bank, in order to repay the loan the bank got.
- throw0101c 4y ago
  > Is it possible for a regular bank to lend money it does not have? Banks create money from nothing to lend out: > Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account. > This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth. * https://www.bankofengland.co.uk/explainers/how-is-money-created https://www.bankofengland.co.uk/explainers/how-is-money-crea... > This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’. * 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... Money is a psychological construct of humans to facilitate trade and the exchange of goods and services. Some societies don't (didn't) even have money/currency: everyone kept a mental 'tally' of who gave or took things, and there were social expectations of giving "gifts" for repayment. Physical tokens (bones, shells, gold, paper, etc) came later.
- trifurcate 4y ago
  That's not what GP is saying. When reserve requirements are low, banks are essentially no longer forbidden from lending out other customers' deposits. When you decrease the reserve requirement, you're unlocking reserves that were previously locked up to back your deposits so that they can be loaned out to other customers, who will then promptly either directly or indirectly end up depositing their loaned amount into the banking system again, where the part that remains after the reserve requirement once again gets loaned out, deposited back in, etc. In effect, because you're making this money go around, you're increasing the total supply of money, because these deposits are the money supply, and there can and often is more than a $1 net increase in overall deposits for each $1 deposited with a bank. Another way to state it is like so: you deposit $1, bank loans out $0.90, someone else deposits that $0.90, their bank loans out $0.81, so on and so forth for $10 of net deposit generation for a $1 initial deposit at 10% reserves held. Of course, individual banks can elect to lock up more reserves than necessary, which would negate this effect.
- stephen_g 4y ago
  The posts above are incorrect about how banks work, but your question is spot on. Actually, banks always lend out money they don’t have - they can’t actually “lend deposits”. The risk of what banks do is why banking licenses are hard to get and it’s so regulated. This primer from the Bank of England is very clear: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
acjohnson55 4y ago
Sure, but they don't have unlimited ability to make loans. They are subject to complex balance sheet constraints. And it's cheaper to borrow money from depositors than the Fed.
SideQuark 4y ago
> Reserve requirements are almost non-existent. This says otherwise. https://fred.stlouisfed.org/series/TOTRESNS https://fred.stlouisfed.org/series/TOTRESNS Lots more real evidence here https://fred.stlouisfed.org/categories/123 https://fred.stlouisfed.org/categories/123
- throw0101c 4y ago
  > This says otherwise. And in Canada, Australia, etc, they are zero: * https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
  - Nursie 4y ago
    Indeed, in these countries the banks have capital requirements, which they also do in the US, instead.
- throwaway742 4y ago
  https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- gilbetron 4y ago
  Those are reserves, not reserve requirements (which are noted as "discontinued" in the first link). To quote this: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm "As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."
  - SideQuark 4y ago
    Read more - the reason is the "ample reserves" regime, where, as I showed, reserves are vastly higher than usual. This is because the Fed has transitioned to a better method to handle what used to be called the reserve requirement. The new (and as the above data demonstrated) is higher actual reserves. This is done via changes in mechanisms, described in the FAQ. It's not like banks suddenly loan out all the money. The Fed page has a FAQ and you can look up related papers. From the FAQ: "For many years, reserve requirements played a central role in the implementation of monetary policy by creating a stable demand for reserves. In January 2019, the FOMC announced its intention to implement monetary policy in an ample reserves regime. Reserve requirements do not play a significant role in this operating framework." People see the change, which is a good move for good reasons, and flip out, just like goldbug times or when CPI get adjusted and so on. A simple way to look at it for a long time there has been a idea battle between what's called endogenous and exogenous money creation (somewhat overview of the debate [1]), and over the past 50 years, most central banking systems have evolved as market needs evolved, to allow banks to lend beyond reserve requirements as long as they soon replenish, which was done via overnight lending windows through central banks. The practical effect is there has not been a "reserve requirement" except in name only for decades. Banks can lend whatever they want, and only have to borrow back to the old requirement which is simply an inefficiency. This is summed up in one sentence on the Wikipedia article on reserve requirements as "Under this view, reserves therefore impose no constraints, as the deposit multiplier is simply, in the words of Kydland and Prescott (1990), a myth" [2] Under the new system, the Fed changed other rates to account for this bookkeeping trick, with the same net effect on the banking system, but under simpler and more transparent accounting. They're not idiots. So, since this was the reality of banking, the FED changed how things are tallied. Just like when CPI changed some terms to handle changes in reality, changes that were well documented, for good reason, people not reading carefully got upset and were sure they got cheated somehow. So setting the old rate to zero and adopting the new methods for monetary control are the same pattern: terms change, in practice things are actually better off, but people used to the old term are upset and mischaracterize it as some a sign of financial calamity or underhandedness. It's not. When people dig this out during an unrelated bank issue as some smoking gun it's worth stopping the nonsense in it's tracks in the same vein as COVID or climate or goldbug nonsense. [1] https://www.sciencedirect.com/science/article/pii/S1090944319303606 https://www.sciencedirect.com/science/article/pii/S109094431... [2] https://en.wikipedia.org/wiki/Reserve_requirement https://en.wikipedia.org/wiki/Reserve_requirement
NovemberWhiskey 4y ago
People read “reserve requirements have gone to zero” (which is true) and assume it is so that banks can keep lower reserves. In fact, reserve requirements became meaningless because banks had (and continue to have) so much more in reserves than they were ever required to have under the prior system.
- hgomersall 4y ago
  And they can get reserves whenever they need to, because that's how the interest rate policy is effected.
- ric2b 4y ago
  I don't understand this, could you clarify? If they have so much more money than the requirements demand, what is the point of lowering the requirements? Who does it help?
  - NovemberWhiskey 4y ago
    The point wasn’t that reserve requirements were “lowered”; they were removed - because the Fed moved to a different mechanism to set short-term interest rates. If banks choose to keep lots of reserves (because you’re paying interest on them), it’s hard to change the willingness of banks to lend by changing the reserve requirement, right? In economic terms, the supply of reserves is meeting the demand curve for reserves in an inelastic region. So the Fed decided to announce a new approach; the so-called “ample reserves regime” where short term interest rate control would be achieved by administered rates rather than by the reserve requirements of the “limited reserves regime” that went before. If this sounds very far from the quotidian business of deposit taking and loan making: that’s because it is.
seanhunter 4y ago
I hear this a lot and it's in a lot of "explainer" videos on youtube and so on. The idea that banks have a special state-sponsored privilege to create credit is completely and very obviously untrue. Try this thought experiment. You and I are in a bar. We order drinks but oh no the bar's card machine is down and you don't have cash. No problem I'll lend you a tenner. 1) Am I a bank? 2) Did I first contact the state to check it was ok to create money in the form of a loan to you? I go back to the bar on another day on my own. Oh no! Their card machine is down again! This time I don't have cash on me. No problem the barman sees me all the time I can have the drink this time and pay up when I next get there and either have cash or their card machine is working. 3) Are they a bank? 4) Did they first contact the state to check it was ok to create money in the form of a loan to me? The answer to all these questions is obviously no. Credit is created throughout the economy at all levels and it is not a special function perculiar to banks.
- swottler 4y ago
  You are talking about credit, not money. Banks create actual state-backed money, which can be physically (or more likely electronically) paid to a third party after they've loaned it to you. A better example would be if you were in the bar alone, and had no money, and instead just wrote an IOU on a bit of paper with your contact details. If we lived in a mythical 100% trustful utopia, then the barman would just accept this as money and so would anyone else in future who the barman needed to pay for anything. But we obviously don't live in such a society so unfortunately no, not anyone can just create money!
  - seanhunter 4y ago
    Banks don't create state-backed money either. The central bank creates money and gets it into the financial system by performing open market activities (eg buying treasuries with it) or depositing it into the accounts it holds with various banks.
    - Kiro 4y ago
      No, the banks create money. If you've watched all these explainer videos surely you must understand basic FRB.
m101 4y ago
Not how it works. How it works is that there are a number of constraints and metrics placed on banks that they need to satisfy and prevent them taking risk. At any time it could be any one of these that is the limiting factor on risk. It may not be a measure of "reserves" that is the constraint.

markmaglana 4y ago

I wonder if it’s correct to also think about it in this way: idle cash devalues over time. Coupled with interest (no matter how small) that they pay out to their depositors, this exposes banks to future liability. To counter that, they have to give “jobs” to as much of this cash as possible so that they can make those payments while also pocketing a profit for themselves.

q7xvh97o2pDhNrh 4y ago
This is indeed a reasonable way to think about it. A dollar tomorrow is worth less than a dollar today. You might enjoy this light reading: https://www.investopedia.com/terms/n/npv.asp https://www.investopedia.com/terms/n/npv.asp
- startupsfail 4y ago
  There are plenty of instruments though with different maturity dates, from a single day to decades. There is no reason to lock money in 10 year notes, it can stay as cash or go to money market or short term obligations.
  - a1445c8b 4y ago
    Too much idle cash is a wasted asset. As for money markets, don’t those get invested in treasury bills/notes anyway? Why go through a “middleman” when one has enough volume to invest directly? Short-term obligations may not provide the yield that their financial structure requires. 10-year notes, in certain situations, provide an optimal combo of yield and risk. Provided, of course, that nothing major happens to the economy which wasn’t the case here. Then again, who’s good at predicting that? In the end, it seemed like, given what was true at the time the decision was made, SVB made a rational choice.
    - howeyc 4y ago
      > As for money markets, don’t those get invested in treasury bills/notes anyway Yeah, but the market price basically stays at $1 and whenever they "break the buck" it's a huge deal. 10 year loans "break the buck" so often that it's extremely strange SVB didn't do anything about it. Basically they should have invested in securities that were safer and fluctuated less, but they got greedy chasing yield and got found out.

stephen_g 4y ago

That’s not how it works. This is a good primer by the Bank of England: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... Bank lending always creates new money. They don’t (and can’t) “lend deposits”.

unyttigfjelltol 4y ago
Maybe, but in the case of SVB, deposit amounts were suspiciously similar to assets.... The BOE is simply pointing out in the link that they are the only proper bank in the UK. All the others borrow from the BOE to make loans. Commercial banks don't "create" money any more than the BOE "borrows" it from elsewhere.... The BOE creates money and lends it to commercial banks who put up a deposit and make a reasonable case for credit.
NovemberWhiskey 4y ago
OK, sure. It’s a distinction without a difference though. If you read pg. 5 of that document, it explains how the effect of market forces results in essentially the same net effect for an individual bank as if they did “lend deposits”. This, plus the other effects (like what the BoE calls “prudential regulation”) are the reason why you don’t see banks with zero deposits and a trillion pounds of loans. Credit vs quantity theory of money is basically a concern of monetary policy (like: what is the expected effect of quantitative easing?) and doesn’t really bear on decisions at the level of individual banks or borrowers: things look consistent with both theories. Like: it doesn’t matter whether classical or relativistic mechanics are “true” if you’re only following the flight of a baseball.
HDThoreaun 4y ago
Of course banks are lending deposits. They're throwing in some investor money too but vast majority of loans they write is using deposits. You can try to make some sort of "number on screen go up" argument, btu the underlying value comes from somewhere. When someone takes a loan and withdraws dollars they're usually getting money that was deposited by a customer.