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Banks don't have to take in customer deposits in order to lend out money Deposits are just a cheap way for them to reduce the delta between what they owe other

by nly 3y ago

Banks don't have to take in customer deposits in order to lend out money Deposits are just a cheap way for them to reduce the delta between what they owe other banks and what other banks owe them (settlement) When a bank writes a loan it simultaneously creates an asset (the loan, which has returning cash flows) and a cash deposit (in the borrowers account) The deposit is only a liability for the bank if it is paid to another bank or withdrawn in physical cash. Otherwise it's all make believe. If I borrow $1000 from BoA and spend it on a guitar, and the previous guitar owner puts that money in to their BoA account, then it's all just a complicated no-op. Even if the new deposit is withdrawn or transferred somewhere else, the bank can still borrow any deficit overnight from other banks at a daily rate that is lower than what they're earning on the loan.

HDThoreaun 3y ago
> at a daily rate that is lower than what they're earning on the loan. Well there's the rub. If the bank is holding loans written early pandemic at sub 3% they'd lose money on the overnight rate. If you're paying 2% on your guitar loan and the depositor is getting 3% the bank is actively losing money. BoA deposits down 8.5% yoy, meaning they need to take out more expensive loans from other banks. This actually is a legitimate problem for them.
- nly 3y ago
  There's less pressure on banks to pay a decent % on deposits than you think. Many banks have hundreds of billions of $$$ sat in accounts paying close to zero interest. A very small % of people seek out good rates on their cash. Also, when rates rise, people tend to use their savings to pay down any debt (mortgage overpayments for instance)
  - landemva 3y ago
    > when rates rise, people tend to use their savings to pay down any debt Why would a rational actor with 2% mortgage (in USA fixed rate) pay it down early, when they can get 4%+ in a money market?
    - nly 3y ago
      Well, maybe the US is a special snowflake wrt to mortgages and that was a bad example. Most of the world doesn't have the luxury of fixing their mortgage debt for 30 years or have a Fannie and Freddie to support them. Plain old businesses also have to tighten their belts and pay down their debts as well though. My broader point is it's all a zero sum game. Almost all the money in existence exists because someone wrote a loan. The existence of debt or the lack of deposits is not inherently a problem. illiquidity isn't a problem if nobody wants to move their money, and interest rates rising isn't a problem if it's accompanied by inflation which will drive up asset values and wages (which support lending)
    - kasey_junk 3y ago
      They absolutely wouldn’t because the US has one of the most regressive subsidies on mortgages in the world. But! Banks don’t (usually) hold mortgages. They sell them to Fannie/Freddie the actual agents responsible for the regressive tax. So banks will have mortgage exposure in the form of mbs, but those are not structured to be extremely long dated.
  - HDThoreaun 3y ago
    Right that's why i brought up boa's dwindling deposits which is forcing up the interest rate they're paying as they take out more overnights.
RandomLensman 3y ago
Why do banks issue so many bonds? Maybe have a look at the funding profile of a typical large bank.
majormajor 3y ago
> The deposit is only a liability for the bank if it is paid to another bank or withdrawn in physical cash. Otherwise it's all make believe. Do you think the majority of loans just sit in borrower's accounts, instead of getting paid to home sellers, vehicle sellers, other debtholders, etc? That banks are just playing with pretend money because somewhere down the chain someone might park it back in the same bank and not touch it for a long time? Loans are entirely about getting that money sitting in deposit out into circulation instead, yes, but you can't simply write those loans without having "real money" to give out for them. That seems like a good, profitable, impossible-to-screw-up business model, the way you describe it, without needing any actual cash funding. Sooo why don't you start one of these banks that doesn't need funds and report back.

by nly 3y ago

HDThoreaun 3y ago

> at a daily rate that is lower than what they're earning on the loan. Well there's the rub. If the bank is holding loans written early pandemic at sub 3% they'd lose money on the overnight rate. If you're paying 2% on your guitar loan and the depositor is getting 3% the bank is actively losing money. BoA deposits down 8.5% yoy, meaning they need to take out more expensive loans from other banks. This actually is a legitimate problem for them.

nly 3y ago
There's less pressure on banks to pay a decent % on deposits than you think. Many banks have hundreds of billions of $$$ sat in accounts paying close to zero interest. A very small % of people seek out good rates on their cash. Also, when rates rise, people tend to use their savings to pay down any debt (mortgage overpayments for instance)
- landemva 3y ago
  > when rates rise, people tend to use their savings to pay down any debt Why would a rational actor with 2% mortgage (in USA fixed rate) pay it down early, when they can get 4%+ in a money market?
  - nly 3y ago
    Well, maybe the US is a special snowflake wrt to mortgages and that was a bad example. Most of the world doesn't have the luxury of fixing their mortgage debt for 30 years or have a Fannie and Freddie to support them. Plain old businesses also have to tighten their belts and pay down their debts as well though. My broader point is it's all a zero sum game. Almost all the money in existence exists because someone wrote a loan. The existence of debt or the lack of deposits is not inherently a problem. illiquidity isn't a problem if nobody wants to move their money, and interest rates rising isn't a problem if it's accompanied by inflation which will drive up asset values and wages (which support lending)
  - kasey_junk 3y ago
    They absolutely wouldn’t because the US has one of the most regressive subsidies on mortgages in the world. But! Banks don’t (usually) hold mortgages. They sell them to Fannie/Freddie the actual agents responsible for the regressive tax. So banks will have mortgage exposure in the form of mbs, but those are not structured to be extremely long dated.
- HDThoreaun 3y ago
  Right that's why i brought up boa's dwindling deposits which is forcing up the interest rate they're paying as they take out more overnights.

RandomLensman 3y ago

Why do banks issue so many bonds? Maybe have a look at the funding profile of a typical large bank.

majormajor 3y ago

> The deposit is only a liability for the bank if it is paid to another bank or withdrawn in physical cash. Otherwise it's all make believe. Do you think the majority of loans just sit in borrower's accounts, instead of getting paid to home sellers, vehicle sellers, other debtholders, etc? That banks are just playing with pretend money because somewhere down the chain someone might park it back in the same bank and not touch it for a long time? Loans are entirely about getting that money sitting in deposit out into circulation instead, yes, but you can't simply write those loans without having "real money" to give out for them. That seems like a good, profitable, impossible-to-screw-up business model, the way you describe it, without needing any actual cash funding. Sooo why don't you start one of these banks that doesn't need funds and report back.