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> Australian banks make their money through mortgages Where do you think your banks get the money to loan out for mortgages? I’ll give you a hint: your deposit

by borski 4y ago

> Australian banks make their money through mortgages Where do you think your banks get the money to loan out for mortgages? I’ll give you a hint: your deposits. This is how banks work.

Aeolun 4y ago
Since they can loan out much more than they get in deposits that’s not strictly true right? You can have 10 house loans for every house sized deposit (or something similar).
- mikeryan 4y ago
  I don't know where that 10x number is from but they can loan more then they take in by taking out lower interest rate loans from central banks. Thats what "The Fed" is. But they're going to use depositor funds first because these days those funds are available at a virtually 0% rate.
- Danieru 4y ago
  You are confused about how fractional reserve works. The 10x multiplier is on the bank's equity. For every dollar of home loan there is a dollar or more of deposits. The multiplier effect of fraction reserve occurs over iterated loans and depositing. The fraction term comes in because the bank can lend out a fraction, less than 1, of deposits.
  - jrockway 4y ago
    Yup. A bank run is problematic because if you keep 99% of the money but 100% of your customers want cash today, then you're screwed.
    - hnfong 4y ago
      The more modern treatment of this situation is that if you sold the mortgage on the open market as a mortgage backed security you might still be solvent as long as the MBS is valued at least at face value. The real problem with failing banks is that interest rates rose steeply, and thus the MBS devalued by a significant amount.
  - terragon 4y ago
    This is incorrect. Fractional reserve lending means that they can keep a fraction of deposits as reserve and loan out the rest. This necessarily means they are not fully covered in times of large withdrawals.
    - Danieru 4y ago
      Sorry, you are not getting what OP was confused about. The OP thought 10dollar of loans existed for every 1dollar of deposits. That is what I address. Instead for every say 9 dollars of loans there exists 10dollars of deposits. You are agreeing with me. The outstanding loans are/should never be greater in value than the outstanding deposits. Aka: they should be a sub 1.0 fraction. Of course the fraction reserve aspect is the inverse ratio, itself also below 1.0.
klooney 4y ago
But there's this endless array of explainers saying they don't- https://www.google.com/search?q=banks%20don%27t%20lend%20deposits%20 https://www.google.com/search?q=banks%20don%27t%20lend%20dep...
- borski 4y ago
  Ugh. Okay, banks don’t take the money that you deposit, turn around and loan it at a higher interest rate directly. But they do use the money you deposit to balance their books and meet the necessary cash reserves that make those loans possible, which is, in effect, lending out your money. When people request their money back en masse, banks face a liquidity issue because of the required fraction reserves they must keep. Directly or indirectly, without your deposits banks cannot lend out money.
- mikeryan 4y ago
  You need to re-read those articles. They don't say banks "don't lend depositor funds" At least the first couple on that page explain that banks don't "need" depositor money to lend and in fact they generally lend out money they borrow from a central bank since their loan outlay tends to outpace their deposits. But outside of the central bank reserve requirements the banks are free to loan our or otherwise invest their depositors cash, which is in fact prudent since cash "loses" value from inflation. Putting that excess funds into loans or other investments can all lead to what happened to SVB if a run on the bank over runs the reserves.
  - jessaustin 4y ago
    ...banks don't "need" depositor money to lend... This seems like one sort of thing, in which money that used to be in a depositor's pocket is now in the bank and available for lending. ...and in fact they generally lend out money they borrow from a central bank... This seems like another sort of thing, in which money that previously did not exist has been created by the Fed changing a number in a spreadsheet so it's now available for lending. You might point out that in our system, these different-seeming things are essentially the same. If so, you're really agreeing with GP.
deleted 4y ago
[deleted]
sacnoradhq 4y ago
Please do us a favor: don't assume the other party is ignorant of fundamentals because such a comment doesn't serve a purpose.
- borski 4y ago
  I made no such assumption. GP implied that bank runs wouldn’t hurt Australian banks. They would. That’s all.
  - sacnoradhq 4y ago
    You didn't quantify or qualify "harm". The ARPA document states AGS permit a bank to stay fully liquid (100% reserve requirements) to cover any potential run. These requirements avoid the failures of bygone eras. Do you have a specific point based on evidence?
    - hnfong 4y ago
      "Managing liquidity risk" means the risk isn't zero. "APRA’s mandate is to protect the community by ensuring that, under all reasonable circumstances, financial promises made by the institutions it supervises are met within a stable, efficient and competitive financial system. So a central part of APRA’s work is to ensure that banks limit the extent of their liquidity risk." Notice it says "all reasonable circumstances". There's a lot of nuance there, and depositors being a small group of VCs who are squeezed on cash and suddenly pulling out all deposits while interest rates are hiking while the bank bet heavily on 10+year MBS isn't the reasonable situation covered here. > AGS permit a bank to stay fully liquid AFAICT this only applies if the current fair value of the AGS covers the liabilities. It doesn't in the case of rapid interest rate hikes like in the US. However, it's probably true that in case of a bank run when interest rates are being lowered, bank assets can probably cover liability even if there's a 100% run. Do note that this is the government institution explaining why the regulatory system makes things fine and people don't need to worry. I don't doubt the system is as robust as is possible, but reading between the lines, it's quite obvious (to me at least) that a SVB-like scenario can still happen in theory under the system. It will just take even more extreme parameters for that to happen (which admittedly doesn't exist in Australia right now, AFAIK).

by borski 4y ago

> Australian banks make their money through mortgages Where do you think your banks get the money to loan out for mortgages? I’ll give you a hint: your deposits. This is how banks work.

Aeolun 4y ago

Since they can loan out much more than they get in deposits that’s not strictly true right? You can have 10 house loans for every house sized deposit (or something similar).

mikeryan 4y ago
I don't know where that 10x number is from but they can loan more then they take in by taking out lower interest rate loans from central banks. Thats what "The Fed" is. But they're going to use depositor funds first because these days those funds are available at a virtually 0% rate.
Danieru 4y ago
You are confused about how fractional reserve works. The 10x multiplier is on the bank's equity. For every dollar of home loan there is a dollar or more of deposits. The multiplier effect of fraction reserve occurs over iterated loans and depositing. The fraction term comes in because the bank can lend out a fraction, less than 1, of deposits.
- jrockway 4y ago
  Yup. A bank run is problematic because if you keep 99% of the money but 100% of your customers want cash today, then you're screwed.
  - hnfong 4y ago
    The more modern treatment of this situation is that if you sold the mortgage on the open market as a mortgage backed security you might still be solvent as long as the MBS is valued at least at face value. The real problem with failing banks is that interest rates rose steeply, and thus the MBS devalued by a significant amount.
- terragon 4y ago
  This is incorrect. Fractional reserve lending means that they can keep a fraction of deposits as reserve and loan out the rest. This necessarily means they are not fully covered in times of large withdrawals.
  - Danieru 4y ago
    Sorry, you are not getting what OP was confused about. The OP thought 10dollar of loans existed for every 1dollar of deposits. That is what I address. Instead for every say 9 dollars of loans there exists 10dollars of deposits. You are agreeing with me. The outstanding loans are/should never be greater in value than the outstanding deposits. Aka: they should be a sub 1.0 fraction. Of course the fraction reserve aspect is the inverse ratio, itself also below 1.0.

klooney 4y ago

But there's this endless array of explainers saying they don't- https://www.google.com/search?q=banks%20don%27t%20lend%20deposits%20 https://www.google.com/search?q=banks%20don%27t%20lend%20dep...

borski 4y ago
Ugh. Okay, banks don’t take the money that you deposit, turn around and loan it at a higher interest rate directly. But they do use the money you deposit to balance their books and meet the necessary cash reserves that make those loans possible, which is, in effect, lending out your money. When people request their money back en masse, banks face a liquidity issue because of the required fraction reserves they must keep. Directly or indirectly, without your deposits banks cannot lend out money.
mikeryan 4y ago
You need to re-read those articles. They don't say banks "don't lend depositor funds" At least the first couple on that page explain that banks don't "need" depositor money to lend and in fact they generally lend out money they borrow from a central bank since their loan outlay tends to outpace their deposits. But outside of the central bank reserve requirements the banks are free to loan our or otherwise invest their depositors cash, which is in fact prudent since cash "loses" value from inflation. Putting that excess funds into loans or other investments can all lead to what happened to SVB if a run on the bank over runs the reserves.
- jessaustin 4y ago
  ...banks don't "need" depositor money to lend... This seems like one sort of thing, in which money that used to be in a depositor's pocket is now in the bank and available for lending. ...and in fact they generally lend out money they borrow from a central bank... This seems like another sort of thing, in which money that previously did not exist has been created by the Fed changing a number in a spreadsheet so it's now available for lending. You might point out that in our system, these different-seeming things are essentially the same. If so, you're really agreeing with GP.

deleted 4y ago

[deleted]

sacnoradhq 4y ago

Please do us a favor: don't assume the other party is ignorant of fundamentals because such a comment doesn't serve a purpose.

borski 4y ago
I made no such assumption. GP implied that bank runs wouldn’t hurt Australian banks. They would. That’s all.
- sacnoradhq 4y ago
  You didn't quantify or qualify "harm". The ARPA document states AGS permit a bank to stay fully liquid (100% reserve requirements) to cover any potential run. These requirements avoid the failures of bygone eras. Do you have a specific point based on evidence?
  - hnfong 4y ago
    "Managing liquidity risk" means the risk isn't zero. "APRA’s mandate is to protect the community by ensuring that, under all reasonable circumstances, financial promises made by the institutions it supervises are met within a stable, efficient and competitive financial system. So a central part of APRA’s work is to ensure that banks limit the extent of their liquidity risk." Notice it says "all reasonable circumstances". There's a lot of nuance there, and depositors being a small group of VCs who are squeezed on cash and suddenly pulling out all deposits while interest rates are hiking while the bank bet heavily on 10+year MBS isn't the reasonable situation covered here. > AGS permit a bank to stay fully liquid AFAICT this only applies if the current fair value of the AGS covers the liabilities. It doesn't in the case of rapid interest rate hikes like in the US. However, it's probably true that in case of a bank run when interest rates are being lowered, bank assets can probably cover liability even if there's a 100% run. Do note that this is the government institution explaining why the regulatory system makes things fine and people don't need to worry. I don't doubt the system is as robust as is possible, but reading between the lines, it's quite obvious (to me at least) that a SVB-like scenario can still happen in theory under the system. It will just take even more extreme parameters for that to happen (which admittedly doesn't exist in Australia right now, AFAIK).