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“ Without the deposits they could not make any loans to begin with.” Incorrect, banks create deposits when they issue loans and only require reserve balances s

by dools 4y ago

“ Without the deposits they could not make any loans to begin with.” Incorrect, banks create deposits when they issue loans and only require reserve balances sufficient to satisfy net flows of funds between institutions. They can also borrow those reserves. So deposits are required to increase profitability, and of course a minimum level of profitability is required to be solvent, but banks in now way “lend out deposits”.

NovemberWhiskey 4y ago
If you actually believe this describes the process then follow me on this thought experiment. TWB (unrelated to SVB) realizes that it’s in trouble - customers are taking a lot of their deposits out, and confidence in the institution is low. So, instead of trying to liquidate some of their assets or raise capital (which is what would be conventional) they decide to lend their bank president a trillion dollars of interest free loan with a recall feature, on the contingency that he deposit it in a non-interest bearing account with a 300 year notice requirement. In your understanding of the mechanics of banking; this is fine. The bank magics $1tn of deposits out of thin air, records an equivalent asset, and can then just pay all of their customers from these new deposits they have. Or not? And if not, why not?
- zajio1am 4y ago
  By issuing deposits, each bank creates essentially its own money which is valid as long as it is inside the bank (used in transactions with other clients that use the same bank), but when clients send money to other banks, the bank has to use 'central bank money'. Which means banking system as a whole creates 'private money' when flows of 'central bank money' between banks are balanced, but each individual bank cannot do it faster than others, otherwise these flows will be negative and it will be losing 'central bank money' and/or hard assets (which would be sold to acquire 'central bank money').

by dools 4y ago

NovemberWhiskey 4y ago

If you actually believe this describes the process then follow me on this thought experiment. TWB (unrelated to SVB) realizes that it’s in trouble - customers are taking a lot of their deposits out, and confidence in the institution is low. So, instead of trying to liquidate some of their assets or raise capital (which is what would be conventional) they decide to lend their bank president a trillion dollars of interest free loan with a recall feature, on the contingency that he deposit it in a non-interest bearing account with a 300 year notice requirement. In your understanding of the mechanics of banking; this is fine. The bank magics $1tn of deposits out of thin air, records an equivalent asset, and can then just pay all of their customers from these new deposits they have. Or not? And if not, why not?

zajio1am 4y ago
By issuing deposits, each bank creates essentially its own money which is valid as long as it is inside the bank (used in transactions with other clients that use the same bank), but when clients send money to other banks, the bank has to use 'central bank money'. Which means banking system as a whole creates 'private money' when flows of 'central bank money' between banks are balanced, but each individual bank cannot do it faster than others, otherwise these flows will be negative and it will be losing 'central bank money' and/or hard assets (which would be sold to acquire 'central bank money').