4 ms·

If everyone gets cash from loans, who'll be the depositors putting cash in the bank to be loaned?

by piva00 4y ago

JumpCrisscross 4y ago
> who'll be the depositors putting cash in the bank to be loaned Loans create deposits, not the other way.
- kgwgk 4y ago
  Increasing the need for reserves, which banks acquire usually via deposits.
  - tome 4y ago
    But not increasing it as fast as the loans increase.
  - tome 4y ago
    But not increasing it as fast as the loans increase, hence, fractional reserve.
    - kgwgk 4y ago
      If the fraction was to stay constant deposits would increase as fast as loans. In fact the problem of the US banking system in the last years has been that deposits have been increasing much faster than loans.
      - tome 4y ago
        > If the fraction was to stay constant deposits would increase as fast as loans. In relative terms yes, in absolute terms, they'd be lower. > the problem of the US banking system in the last years has been that deposits have been increasing much faster than loans Yes, it seems to be. "Too much money chasing too few returns", as they say.
        kgwgk 4y ago
        > In relative terms yes, in absolute terms, they'd be lower. Not really. The Loan-to-Deposit ratio is usually lower than one so if both double that means that deposits grow more than loans in absolute terms.
        tome 4y ago
        Yeah, that's my misuse of the term "deposit" where I meant something like "total reserve amount".
tome 4y ago
Loans are not made from deposits even now. But you may well be right that there are operational details that make my idea impossible, I don't know. HN seems to have some people with understanding of corporate finance, so hopefully they'll be able to educate me.
- kgwgk 4y ago
  > Loans are not made from deposits even now. But banks have more deposits than loans even now. Because they need to get money from somewhere.
  - tome 4y ago
    No they don't, because the banking system is fractional reserve. Pretty much every bank has more outstanding loans that deposits (even if part of those loans is to the government).
    - kgwgk 4y ago
      Can you point to a bank with more loans than deposits in its balance sheet? (Honest question, I'm curious.) As far as I can see the banking system in aggregate has more deposits than loans: https://www.federalreserve.gov/releases/h8/current/default.htm https://www.federalreserve.gov/releases/h8/current/default.h...
      - tome 4y ago
        Thanks, I think there's something faulty in my understanding of terminology. By "deposits" I was understanding "deposits backed by holdings at the central bank". The original question I was trying to answer was "If everyone gets cash from loans, who'll be the depositors putting cash in the bank to be loaned?". I just don't think that question is well-posed. A bank creating a loan requires new cash deposits of only R x loan_amount, where R is the reserve requirement. For making payroll this ought to be almost nothing.
        4y ago

If everyone gets cash from loans, who'll be the depositors putting cash in the bank to be loaned?

by piva00 4y ago

If everyone gets cash from loans, who'll be the depositors putting cash in the bank to be loaned?

JumpCrisscross 4y ago

> who'll be the depositors putting cash in the bank to be loaned Loans create deposits, not the other way.

kgwgk 4y ago
Increasing the need for reserves, which banks acquire usually via deposits.
- tome 4y ago
  But not increasing it as fast as the loans increase.
- tome 4y ago
  But not increasing it as fast as the loans increase, hence, fractional reserve.
  - kgwgk 4y ago
    If the fraction was to stay constant deposits would increase as fast as loans. In fact the problem of the US banking system in the last years has been that deposits have been increasing much faster than loans.
    - tome 4y ago
      > If the fraction was to stay constant deposits would increase as fast as loans. In relative terms yes, in absolute terms, they'd be lower. > the problem of the US banking system in the last years has been that deposits have been increasing much faster than loans Yes, it seems to be. "Too much money chasing too few returns", as they say.
      - kgwgk 4y ago
        > In relative terms yes, in absolute terms, they'd be lower. Not really. The Loan-to-Deposit ratio is usually lower than one so if both double that means that deposits grow more than loans in absolute terms.
        tome 4y ago
        Yeah, that's my misuse of the term "deposit" where I meant something like "total reserve amount".

tome 4y ago

Loans are not made from deposits even now. But you may well be right that there are operational details that make my idea impossible, I don't know. HN seems to have some people with understanding of corporate finance, so hopefully they'll be able to educate me.

kgwgk 4y ago
> Loans are not made from deposits even now. But banks have more deposits than loans even now. Because they need to get money from somewhere.
- tome 4y ago
  No they don't, because the banking system is fractional reserve. Pretty much every bank has more outstanding loans that deposits (even if part of those loans is to the government).
  - kgwgk 4y ago
    Can you point to a bank with more loans than deposits in its balance sheet? (Honest question, I'm curious.) As far as I can see the banking system in aggregate has more deposits than loans: https://www.federalreserve.gov/releases/h8/current/default.htm https://www.federalreserve.gov/releases/h8/current/default.h...
    - tome 4y ago
      Thanks, I think there's something faulty in my understanding of terminology. By "deposits" I was understanding "deposits backed by holdings at the central bank". The original question I was trying to answer was "If everyone gets cash from loans, who'll be the depositors putting cash in the bank to be loaned?". I just don't think that question is well-posed. A bank creating a loan requires new cash deposits of only R x loan_amount, where R is the reserve requirement. For making payroll this ought to be almost nothing.
      - 4y ago