2 ms·

> Banks use deposits to extend loans to other customers "Money creation in the modern economy" from the Bank of England is worth a read - it explains why this

by scrlk 4y ago

> Banks use deposits to extend loans to other customers "Money creation in the modern economy" from the Bank of England is worth a read - it explains why this isn't the case. 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...

pgwhalen 4y ago
This is nitpicking. While that paper is a good read and important to understand how banking works, the parent commenter's point about how money creation works, and how a narrow bank would not participate in it, is valid. Deposits _are_ a source of funding that a bank considers when making loans, even if a bank does not "turn deposits into loans."
lbsnake7 4y ago
I have been reading about this topic recently and still don't really understand how 'new money' is being created. In a loan, the bank creates an IOU that didn't exist before and doesn't point to a stack of $$ on the shelf. But it does point to the bank, and the bank itself has tons of customer deposits. And if I take that IOU and give it to a car dealership who puts it in their bank, for the transfer my bank will take actual money from the general pool of customer deposits. AND I have to pay back the loan which goes into the general pool. So while specific money isn't earmarked, the IOU represents money that the bank has right? I guess a way to ask the question would be: if i were to liquidate all assets of a bank and call in every loan, would that be >= all customer deposits?
- rashkov 4y ago
  Also been thinking about this. If you look at this article, read section titled “money creation process” https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking If I deposit $5 in my bank account, and then the bank keeps $1 in reserve and lends out $4, then they just added $4 to the money supply. I can withdraw my $5, and the loan-taker can withdraw their $4. This is possible because there’s a reserve pool of money which is not loaned out, and because people tend to just leave the money in their account. At least that’s my understanding. Happy to be corrected
- scrlk 4y ago
  For a solvent bank, assets >= liabilities. Customer deposits are liabilities on a balance sheet.

by scrlk 4y ago

pgwhalen 4y ago

This is nitpicking. While that paper is a good read and important to understand how banking works, the parent commenter's point about how money creation works, and how a narrow bank would not participate in it, is valid. Deposits _are_ a source of funding that a bank considers when making loans, even if a bank does not "turn deposits into loans."

lbsnake7 4y ago

I have been reading about this topic recently and still don't really understand how 'new money' is being created. In a loan, the bank creates an IOU that didn't exist before and doesn't point to a stack of $$ on the shelf. But it does point to the bank, and the bank itself has tons of customer deposits. And if I take that IOU and give it to a car dealership who puts it in their bank, for the transfer my bank will take actual money from the general pool of customer deposits. AND I have to pay back the loan which goes into the general pool. So while specific money isn't earmarked, the IOU represents money that the bank has right? I guess a way to ask the question would be: if i were to liquidate all assets of a bank and call in every loan, would that be >= all customer deposits?

rashkov 4y ago
Also been thinking about this. If you look at this article, read section titled “money creation process” https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking If I deposit $5 in my bank account, and then the bank keeps $1 in reserve and lends out $4, then they just added $4 to the money supply. I can withdraw my $5, and the loan-taker can withdraw their $4. This is possible because there’s a reserve pool of money which is not loaned out, and because people tend to just leave the money in their account. At least that’s my understanding. Happy to be corrected
scrlk 4y ago
For a solvent bank, assets >= liabilities. Customer deposits are liabilities on a balance sheet.