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Banks in compliance can create loans on demand. They don't need to borrow the funds.

notahacker 4y ago
Yes in normal circumstances they won't need to immediately borrow the full outstanding amount of the loan to convert it to cash, but the fact they can borrow £1m in reserves at that rate to the extent capital weighting rules or withdrawal demands require it is critical to why the £1m credit they add in the borrower's account is treated as money by other banks and their customers. As is the detail that the bank's profit is only the difference between the interest rate paid by the business and the bank: the bit they create "from thin air" isn't their asset, it's a liability they may be required to borrow to pay some other bank or customer.
- bubbleRefuge 4y ago
  If the bank that creates the loan and subsequent deposit is the same bank, then its like creating money out of thin air, as they would be responsible for the reserve requirement imposed on them by that deposit. Reserve requirements can be zero and usually don't have to be met until the next accounting period. So there are not funding constraints on making loans.
  - notahacker 4y ago
    I never argued there were funding constraints on making loans (there are capital constraints, but they're fuzzier). But the deposit is the bank's liability, not its asset (unlike, say, an organization having the ability to mint coins or cryptotokens for its own use from thin air; much more like Amazon's ability to create as many $10 vouchers as it wants, provided it's got a way of paying its vendors when people try to spend the vouchers). The only reason anybody else treats the increased number in the customer's bank account as "money" equivalent to cash is that the bank can borrow currency if and when it needs it (and remain solvent because eventually the customer will pay the bank back)
    - bubbleRefuge 4y ago
      Yeah. Sounds good. The bank needs reserves, order federal money, base, or inside money(call it what you want) to meet deposit liabilities when they are called such as when the deposit owner writes a check to another bank or when funds are withdrawn for cash.

Yes in normal circumstances they won't need to immediately borrow the full outstanding amount of the loan to convert it to cash, but the fact they can borrow £1m in reserves at that rate to the extent capital weighting rules or withdrawal demands require it is critical to why the £1m credit they add in the borrower's account is treated as money by other banks and their customers. As is the detail that the bank's profit is only the difference between the interest rate paid by the business and the bank: the bit they create "from thin air" isn't their asset, it's a liability they may be required to borrow to pay some other bank or customer.

bubbleRefuge 4y ago
If the bank that creates the loan and subsequent deposit is the same bank, then its like creating money out of thin air, as they would be responsible for the reserve requirement imposed on them by that deposit. Reserve requirements can be zero and usually don't have to be met until the next accounting period. So there are not funding constraints on making loans.
- notahacker 4y ago
  I never argued there were funding constraints on making loans (there are capital constraints, but they're fuzzier). But the deposit is the bank's liability, not its asset (unlike, say, an organization having the ability to mint coins or cryptotokens for its own use from thin air; much more like Amazon's ability to create as many $10 vouchers as it wants, provided it's got a way of paying its vendors when people try to spend the vouchers). The only reason anybody else treats the increased number in the customer's bank account as "money" equivalent to cash is that the bank can borrow currency if and when it needs it (and remain solvent because eventually the customer will pay the bank back)
  - bubbleRefuge 4y ago
    Yeah. Sounds good. The bank needs reserves, order federal money, base, or inside money(call it what you want) to meet deposit liabilities when they are called such as when the deposit owner writes a check to another bank or when funds are withdrawn for cash.