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> There is allot of financial illiteracy regarding the banking system. And nor does the balance sheet become inexplicably unbalanced. It issues bills, a liabi
by zhte415 4y ago
> There is allot of financial illiteracy regarding the banking system.
And nor does the balance sheet become inexplicably unbalanced. It issues bills, a liability, which will cancel out as an asset unless it sells them, or takes a value from it's balance sheet capital, or gets interbank funding (which still balances, because that's another bank's asset).
You're not wrong a bank can fund it's lending, indeed there's that often cited BoE paper all about it, but that funding doesn't come from thin air.
- bubbleRefuge 4y agoThe accounting is like this. Bank A is in compliance for the current period of time under examination (capital requirments and reserve requirements). Bank A makes a loan L1 to person B. This is a contract. Bank A has an asset in L1 on its balance sheet(this improves its capital ratio) and person B has L1 on her balance sheet as a liability. Person B makes a deposit of L1 amount into Bank B. Bank B has a liability of L1. Person B has an asset of L1 which is her deposit which she owns. Finally, Bank A makes a reserve payment to Bank B of L1. These reserves come out of the reserve account that each bank has at the Fed. The reserves maybe borrowed in the Federal Funds market on demand so long as the bank is in compliance.