11 ms·

> In Synapse's case, their ledger said the total amount of all of their individual customer balances ended up being much more than the actual funds held in the

> In Synapse's case, their ledger said the total amount of all of their individual customer balances ended up being much more than the actual funds held in the underlying FBO accounts. When the banks do this it's called "fractional reserve banking", and they sell it as a good thing. :)

thaumasiotes 2y ago
There's more to it than that; balances are exceeded by the sum of "assets held by the bank" and "assets owed to the bank".
deleted 2y ago
[deleted]
Aurornis 2y ago
I’m constantly amazed by how much the crypto community thinks they understand fractional reserve banking while getting it so completely wrong. In fractional reserve banking, money that is loaned out is accounted for as liabilities. These liabilities subtract from the overall balance stored (reserved) at the bank. The bank is not printing money new money, no matter how many times this idea gets repeated by people who are, ironically, pumping crypto coins that were printed out of thin air. I think it’s incredible that cryptocurrencies were literally manifested out of bits, but the same people try to criticize banks for doing this same thing (which they don’t).
- zmgsabst 2y ago
  Clarifying question: So for every $1 deposited, I can lend $0.90 but must hold $0.10 as my reserve?
  - ianburrell 2y ago
    That is exactly what happens. Reserve ratio used to be 10%, same as your example. The reserve ratio is currently zero, lowered in 2020 during pandemics. But banks still can't lend out more than deposits.
    - hgomersall 2y ago
      Fortunately, loans create deposits, so they are always in balance.
    - dataflow 2y ago
      > The reserve ratio is currently zero, lowered in 2020 during pandemics. I saw this during the pandemic, and it bewildered me how little coverage of it there was. How is this not going to cause another financial catastrophe? And if we're so sure it isn't, then what makes people think they under economics so well, given that they clearly thought a minimum was necessary just a few years ago?
      - schnitzelstoat 2y ago
        Many central banks like the Bank of England don't even have a reserve requirement and rely on the bank rate to control it instead. The equivalent for the USA would be the Federal Funds Rate, I suppose. The reserve requirement is just one tool among many.
      - throw0101a 2y ago
        > I saw this during the pandemic, and it bewildered me how little coverage of it there was. How is this not going to cause another financial catastrophe? The banks in Australia, Canada, etc have had zero reserve requirements for thirty years: * https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_... The US had reserve requirements leading up to the 2008 GFC which started off with mortgages/loans, and yet those requirement didn't stop the disaster. Canada et al did not have requirements, and yet it didn't have a financial meltdown (not itself, only as 'collateral damage' to what happened in the US).
      - AmirS2 2y ago
        Because what matters is _Capital_ requirements, which differ by the _risk_ of the loan. A bank's Capital is what limits their ability to lend. Reserve requirements are irrelevant in the modern banking system.
    - 2y ago
  - hectormalot 2y ago
    It’s a bit more complicated than that. At the point I make a loan, 2 things happen on my balance sheet: I have a new liability to you (the increased balance in your account), and I have a new asset (the loan that you’re expected to pay back). They cancel each other out and it therefore seems as if I’m creating money out of thin air. However, the moment you actually use that money (eg to buy something), the money leaves the bank (unless the other account is also at this bank, but let’s keep it simple). Liabilities on the balance sheet shrink, so assets need to follow. That needs to come from reserves because the loan asset keeps its original value. The reserve comes from the bank, not from you. Added layer here: Banks can borrow money from each other or central banks if their cash reserves runs low. Finally: it tends to be the case that the limit on lending is not the reserves, but on the capital constraints. Banks need to retain capital for each loan they make. This is weighed against the risk of these loans. For example: you could lend a lot more in mortgages than in business loans without collateral. Ask your favorite LLM to explain RWAs and Basel III for more.
    - AnthonyMouse 2y ago
      > However, the moment you actually use that money (eg to buy something), the money leaves the bank (unless the other account is also at this bank, but let’s keep it simple). Liabilities on the balance sheet shrink, so assets need to follow. That needs to come from reserves because the loan asset keeps its original value. "Everything should be made as simple as possible but no simpler." You're omitting the thing that causes the money to be created out of thin air. If the other account is at the same bank, now that customer has money in their account that didn't previously exist. And the same thing happens even if the money goes to a customer at another bank -- then that bank's customer has money in their account that didn't previously exist. Even if some reserves are transferred from one bank to another, the total reserves across the whole banking system haven't changed, but the total amount of money on deposit has. And the transfers into and out of the average bank are going to net to zero. The created money gets destroyed when the loan is paid back, but the total amount of debt generally increases over time so the amount of debt-created money goes up over time as banks make new loans faster than borrowers pay them back.
      - 2y ago
  - throw0101a 2y ago
    > So for every $1 deposited, I can lend $0.90 but must hold $0.10 as my reserve? The GP is completely wrong on how modern finance works. Banks do not lend out deposits. This was called the "Old View" by Tobin in 1963: * https://elischolar.library.yale.edu/cowles-discussion-paper-series/388/ https://elischolar.library.yale.edu/cowles-discussion-paper-... The Bank of England has a good explainer on how money is created: * 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... See also Cullen Roche: * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 * https://rationalreminder.ca/podcast/132 https://rationalreminder.ca/podcast/132
    - ta12653421 2y ago
      Partially untrue: Yes, they do not need customer deposits to create loans and increase their balance sheet, there are just some guys like you and me, putting the amount in the balance sheet and clicking save (simply put) But yes, they need to have at least some customer deposists to make payments happen, since if they do not have any deposits, their central banking account would be empty, therefore none of your loans could actually leave your bank since the transaction wont happen. (i'm talking from perspective of TARGET2 / ECB / EURO system)
- kevin_nisbet 2y ago
  This is a good explanation, I've had to explain this topic a few times as well, it seems like it's one of those topics that is very missunderstood. To just expand a bit, I believe some of the confusion around printing of money comes from the way some economics reports are built. As a micro example, Assume a 10% required reserve, If Alice deposits $100 and the bank lends $90 to Bob. Alice ($100 deposits) + Bob ($90 cash) think they have $190 in total. This is mainly useful for economists to understand, study, and report on. However, when the reports get distributed to the public, it looks like the banks printed their own money, as we now see $190 on the report when there is only $100 of cash in our example system. Whether the system should work on a fractional reserve is it's own debate, but we need to know what it is to debate the merits and risks of the system.
  - neilwilson 2y ago
    And how does that work when the 'required reserve' is zero as it is now, and has been in the rest of the world since time immemorial? Nobody deposits in a bank - it's just a retag of an existing deposit. The bank Debits a loan account with the amount owed, and Credits a deposit account with the advance. It's a simple balance sheet expansion in double-entry bookkeeping. I'm really not sure why this myth persists given that central banks debunked the concept over a decade ago. Loans create deposits, and those deposits are then converted into bank capital when a deposit holder buys bank capital bonds or equity. [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
    - immibis 2y ago
      Most people deposit in a bank by transferring from another bank. There is more than one bank.
      - neilwilson 2y ago
        Now do the balance sheet journals for such a transfer. [0] Then you'll see that for a bank to transfer to another bank the destination bank has to take over the deposit in the source bank (or swap that liability with another bank somewhere). You have an infinite regress in your thinking. [0]: https://new-wayland.com/blog/why-banks-pay-interest-on-deposits/ https://new-wayland.com/blog/why-banks-pay-interest-on-depos...
- serbuvlad 2y ago
  First of all, I take offense to being thrown in as part of the crypto community, with which I have nothing to do, and for which I do not have much hope. So now if you are unhappy with the monetary system you are automatically a crypto bro and can be dismissed? Secondly, the problem with fractional reserve banking is as follows: Suppose Larry makes a deposit of one dollar, which the bank guarantees can be retrieved at any time. The bank loans this dollar to Catherine, which uses it to buy something from Steve. Now Steve has one dollar, which he deposits with the bank. The bank lends this dollar to Catherine2, which uses it to buy something from Steve2. And so on, up to CatherineN and SteveN Now, in so far as transactions can take place in the economy with bank IOUs, which are considered perfect money substitutes, the amount of money in the economy has been multiplied by a factor of N. Where before only Peter had a dollar (or a dollar IOU, which are supposedly the same), now Pere AND Steve, Steve2, up to SteveN all have a dollar IOU. This leads to an inflationary pressure. Now it is true that upon the Catherine's repaying of the debt, these extra dollars will go away. However, in reality there is no such thing as negative dollars. The supply of money has been increased by the bank. An objection could be raised that Catherine's extra demand for money to pay off her debt will exactly offset the extra supply of money. This is nonsense! Everyone demands money all the time. If Catherine did not demand money to pay off her loan, she would demand money in order to satisfy her next most urgent want which could be satisfied by money. The increase in the demand for money is negligible.
  - namaria 2y ago
    Your mistake was saying Synapse merely did what banks do. Banks don't lose track of money when they increase the money supply.
    - serbuvlad 2y ago
      My comment was meant as a tounge-in-cheek joke, with a dig at the banking system. It was not meant as a serious equivocation between what Synapse did and what banks do.
  - nly 2y ago
    Your explanation of fractional reserve banking is somewhat correct, but missing the big picture Licensed banks can and do write loans at any time without having any deposits to 'lend out'. In doing so they create both the loan (an asset) and a deposit (a liability) simultaneously from thin air. The books immediately balance. The deposit created is then paid to the borrower and the liability vanishes. The bank is left with only the asset - the one that they created from thin air. For short term liquidity a bank can always use the overnight lending facility at the central bank. Doing so just makes all their loans far less profitable as this is at a floating daily rate. In reality the limit to which the money supply grows is not dictated by 'fractional reserves', but solely by interest rate policy and the commercial viability of being able to make loans and demand in the economy.
- willmadden 2y ago
  The bank IS printing new money. You are ignoring the money multiplier effect where the money lent by bank 1 is deposited into bank 2, bank 2 lends 90% of that deposit, which is deposited into bank 3, ... repeating the process over and over. With a 10% reserve requirement, a 1,000,000 USD deposit will result in up to 10 times that much money being lent out. The formula is 1/r, where r is the reserve requirement.
  - ArnoVW 2y ago
    interestingly, the Fed's page on Reserve Requirements states: As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. So in effect, the multiplier is infinity. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
    - gastonmorixe 2y ago
      I remember this. Have they ever rolled it back?
      - neffy 2y ago
        The Basel Capital rules dominate at the moment. If that ever gets rolled back... buy gold immediately.
        gastonmorixe 2y ago
        Oh ok. So there’s a difference between reserve requirements and capital requirements. Capital requirements are still in place Basel III (Basel Capital Rules) 4.5% among other requirements https://en.m.wikipedia.org/wiki/Basel_III https://en.m.wikipedia.org/wiki/Basel_III
        hgomersall 2y ago
        Basel III also specifies liquidity requirements, which basically means banks need to hold sufficient loan assets in the government or central bank (generally bonds or reserves respectively), which act as a backstop if other banks stop lending to them (i.e. stop accepting deposit transfers without also being given an equivalent asset).
- simula67 2y ago
  > The bank is not printing money new money, no matter how many times this idea gets repeated by people who are, ironically, pumping crypto coins that were printed out of thin air. It is now widely accepted that bank lending produces new money[1][2] [1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... [2] https://www.youtube.com/watch?v=K3lP3BhvnSo https://www.youtube.com/watch?v=K3lP3BhvnSo
  - Agingcoder 2y ago
    Yes. That’s how it was taught to me years ago, that’s how it’s understood in the banking industry as well, incl the private sector. From a large eurozone bank : https://group.bnpparibas/en/news/money-creation-work https://group.bnpparibas/en/news/money-creation-work
  - hgomersall 2y ago
    There's an inordinate amount of nonsense being espoused in this thread, when the answer is in that first link. I can only assume it's the miseducation that economics textbooks perpetuate.
- jnwatson 2y ago
  The "liabilities" aren't subtracted from the deposit amount when counted as M1 supply. (Actually loans are accounted for as assets and deposits are liabilities, but that's beside the point). If customer A deposits $100 in cash, and customer B borrows $100 from the bank and deposits it back in the bank, M1 goes up because there are now two checking accounts with $100 in it. That the bank's internal bookkeeping balances doesn't change the fact that the Fed considers that more money exists.
  - gus_massa 2y ago
    I agree. The main point is that if B knows that they don't have to repay the $100 until 10 years in the future, then for the 10 next years everyone can pretend there are $200 in total.
  - notahacker 2y ago
    > That the bank's internal bookkeeping balances doesn't change the fact that the Fed considers that more money exists. The Fed considers that more M1 exists and the same amount of M0 exists. Both are considered monetary aggregates, but M0 is the "money" the bank needs to worry about to stay solvent, and it can't "print" that. Whilst it's semantically correct to refer to both M1 and M0 as money, it's pretty clear that it's wrong for people people to elide the two to insinuate that banks are printing themselves balances out of thin air like token issuers or insolvent companies that screwed up their customer balance calculations, which is what the OP was covering. And the Fed wouldn't consider more money to exist if the bank's internal bookkeeping didn't balance...
- stackghost 2y ago
  >These liabilities subtract from the overall balance stored (reserved) at the bank. The bank is not printing money new money Hi, this is factually incorrect and you should educate yourself before attempting any further condescending comments on Hacker News.
- deleted 2y ago
  [deleted]
- victorbjorklund 2y ago
  But Banks are increasing the money supply with fractional reserve bank. But that is of course on purpose and account for by the govt.
- throw0101a 2y ago
  > In fractional reserve banking, money that is loaned out is accounted for as liabilities. Yes, that is how a fractional reserve banking works. But that is not how the current banking system works. * https://www.stlouisfed.org/publications/page-one-economics/2021/09/17/teaching-the-linkage-between-banks-and-the-fed-r-i-p-money-multiplier https://www.stlouisfed.org/publications/page-one-economics/2... * https://www.pragcap.com/r-i-p-the-money-multiplier/ https://www.pragcap.com/r-i-p-the-money-multiplier/ Banks do not lend out deposits. This was called the "Old View" by Tobin in 1963: * https://elischolar.library.yale.edu/cowles-discussion-paper-series/388/ https://elischolar.library.yale.edu/cowles-discussion-paper-... The Bank of England has a good explainer on how money is created: * 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... See also Cullen Roche: * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 * https://rationalreminder.ca/podcast/132 https://rationalreminder.ca/podcast/132
  - notahacker 2y ago
    Money that is loaned out is still accounted for as liabilities. Sure, those liabilities are accounted for in an eventually consistent matter by reconciling imbalances on interbank lending markets at the end of the day with the government topping up any systemic shortfall rather than by counting out deposit coins in the vault But that's fundamentally much closer to the "Old Money" view than to the OP's claim about fractional reserve being like an FBO inflating customer deposits by failing to track trades properly. All the credit extended by the bank is accounted for, and all of it that isn't backed by reserves is backed by the bank's obligations to someone else.
    - throw0101a 2y ago
      > Money that is loaned out is still accounted for as liabilities. To be clear: * Money is "loaned out" in the sense that a bank credits your account. * Money is not loaned out in the sense that which "goes into" your account did not come out of someone else's account. Rather it was created 'out of thin air' by the bank without reference to anyone else's deposits.
- immibis 2y ago
  In fractional reserve banking, the total deposits at a bank can be greater than the amount of physical money it holds. Since the rest of society is willing to accept bank deposits as an alternative to physical money, this is a form of printing money. Physical currency is not printed, but bank deposit currency (which is money, by de facto agreement) is.
- no_wizard 2y ago
  I just want the gold standard back. It worked as an actual check on money supply and went implemented properly was harder to manipulate
  - dumah 2y ago
    The US Government formerly fixed gold prices by statute and prohibited US citizens from owning or trading gold anywhere around the world. The idea such a system could function in todays world is strange to me.
Shalah 2y ago
@serbuvlad: “When the banks do this it's called "fractional reserve banking", and they sell it as a good thing. :)” How dare you criticize our holy banking system /s

thaumasiotes 2y ago

There's more to it than that; balances are exceeded by the sum of "assets held by the bank" and "assets owed to the bank".

deleted 2y ago

[deleted]

Aurornis 2y ago

I’m constantly amazed by how much the crypto community thinks they understand fractional reserve banking while getting it so completely wrong. In fractional reserve banking, money that is loaned out is accounted for as liabilities. These liabilities subtract from the overall balance stored (reserved) at the bank. The bank is not printing money new money, no matter how many times this idea gets repeated by people who are, ironically, pumping crypto coins that were printed out of thin air. I think it’s incredible that cryptocurrencies were literally manifested out of bits, but the same people try to criticize banks for doing this same thing (which they don’t).

zmgsabst 2y ago
Clarifying question: So for every $1 deposited, I can lend $0.90 but must hold $0.10 as my reserve?
- ianburrell 2y ago
  That is exactly what happens. Reserve ratio used to be 10%, same as your example. The reserve ratio is currently zero, lowered in 2020 during pandemics. But banks still can't lend out more than deposits.
  - hgomersall 2y ago
    Fortunately, loans create deposits, so they are always in balance.
  - dataflow 2y ago
    > The reserve ratio is currently zero, lowered in 2020 during pandemics. I saw this during the pandemic, and it bewildered me how little coverage of it there was. How is this not going to cause another financial catastrophe? And if we're so sure it isn't, then what makes people think they under economics so well, given that they clearly thought a minimum was necessary just a few years ago?
    - schnitzelstoat 2y ago
      Many central banks like the Bank of England don't even have a reserve requirement and rely on the bank rate to control it instead. The equivalent for the USA would be the Federal Funds Rate, I suppose. The reserve requirement is just one tool among many.
    - throw0101a 2y ago
      > I saw this during the pandemic, and it bewildered me how little coverage of it there was. How is this not going to cause another financial catastrophe? The banks in Australia, Canada, etc have had zero reserve requirements for thirty years: * https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_... The US had reserve requirements leading up to the 2008 GFC which started off with mortgages/loans, and yet those requirement didn't stop the disaster. Canada et al did not have requirements, and yet it didn't have a financial meltdown (not itself, only as 'collateral damage' to what happened in the US).
    - AmirS2 2y ago
      Because what matters is _Capital_ requirements, which differ by the _risk_ of the loan. A bank's Capital is what limits their ability to lend. Reserve requirements are irrelevant in the modern banking system.
  - 2y ago
- hectormalot 2y ago
  It’s a bit more complicated than that. At the point I make a loan, 2 things happen on my balance sheet: I have a new liability to you (the increased balance in your account), and I have a new asset (the loan that you’re expected to pay back). They cancel each other out and it therefore seems as if I’m creating money out of thin air. However, the moment you actually use that money (eg to buy something), the money leaves the bank (unless the other account is also at this bank, but let’s keep it simple). Liabilities on the balance sheet shrink, so assets need to follow. That needs to come from reserves because the loan asset keeps its original value. The reserve comes from the bank, not from you. Added layer here: Banks can borrow money from each other or central banks if their cash reserves runs low. Finally: it tends to be the case that the limit on lending is not the reserves, but on the capital constraints. Banks need to retain capital for each loan they make. This is weighed against the risk of these loans. For example: you could lend a lot more in mortgages than in business loans without collateral. Ask your favorite LLM to explain RWAs and Basel III for more.
  - AnthonyMouse 2y ago
    > However, the moment you actually use that money (eg to buy something), the money leaves the bank (unless the other account is also at this bank, but let’s keep it simple). Liabilities on the balance sheet shrink, so assets need to follow. That needs to come from reserves because the loan asset keeps its original value. "Everything should be made as simple as possible but no simpler." You're omitting the thing that causes the money to be created out of thin air. If the other account is at the same bank, now that customer has money in their account that didn't previously exist. And the same thing happens even if the money goes to a customer at another bank -- then that bank's customer has money in their account that didn't previously exist. Even if some reserves are transferred from one bank to another, the total reserves across the whole banking system haven't changed, but the total amount of money on deposit has. And the transfers into and out of the average bank are going to net to zero. The created money gets destroyed when the loan is paid back, but the total amount of debt generally increases over time so the amount of debt-created money goes up over time as banks make new loans faster than borrowers pay them back.
    - 2y ago
- throw0101a 2y ago
  > So for every $1 deposited, I can lend $0.90 but must hold $0.10 as my reserve? The GP is completely wrong on how modern finance works. Banks do not lend out deposits. This was called the "Old View" by Tobin in 1963: * https://elischolar.library.yale.edu/cowles-discussion-paper-series/388/ https://elischolar.library.yale.edu/cowles-discussion-paper-... The Bank of England has a good explainer on how money is created: * 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... See also Cullen Roche: * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 * https://rationalreminder.ca/podcast/132 https://rationalreminder.ca/podcast/132
  - ta12653421 2y ago
    Partially untrue: Yes, they do not need customer deposits to create loans and increase their balance sheet, there are just some guys like you and me, putting the amount in the balance sheet and clicking save (simply put) But yes, they need to have at least some customer deposists to make payments happen, since if they do not have any deposits, their central banking account would be empty, therefore none of your loans could actually leave your bank since the transaction wont happen. (i'm talking from perspective of TARGET2 / ECB / EURO system)
kevin_nisbet 2y ago
This is a good explanation, I've had to explain this topic a few times as well, it seems like it's one of those topics that is very missunderstood. To just expand a bit, I believe some of the confusion around printing of money comes from the way some economics reports are built. As a micro example, Assume a 10% required reserve, If Alice deposits $100 and the bank lends $90 to Bob. Alice ($100 deposits) + Bob ($90 cash) think they have $190 in total. This is mainly useful for economists to understand, study, and report on. However, when the reports get distributed to the public, it looks like the banks printed their own money, as we now see $190 on the report when there is only $100 of cash in our example system. Whether the system should work on a fractional reserve is it's own debate, but we need to know what it is to debate the merits and risks of the system.
- neilwilson 2y ago
  And how does that work when the 'required reserve' is zero as it is now, and has been in the rest of the world since time immemorial? Nobody deposits in a bank - it's just a retag of an existing deposit. The bank Debits a loan account with the amount owed, and Credits a deposit account with the advance. It's a simple balance sheet expansion in double-entry bookkeeping. I'm really not sure why this myth persists given that central banks debunked the concept over a decade ago. Loans create deposits, and those deposits are then converted into bank capital when a deposit holder buys bank capital bonds or equity. [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
  - immibis 2y ago
    Most people deposit in a bank by transferring from another bank. There is more than one bank.
    - neilwilson 2y ago
      Now do the balance sheet journals for such a transfer. [0] Then you'll see that for a bank to transfer to another bank the destination bank has to take over the deposit in the source bank (or swap that liability with another bank somewhere). You have an infinite regress in your thinking. [0]: https://new-wayland.com/blog/why-banks-pay-interest-on-deposits/ https://new-wayland.com/blog/why-banks-pay-interest-on-depos...
serbuvlad 2y ago
First of all, I take offense to being thrown in as part of the crypto community, with which I have nothing to do, and for which I do not have much hope. So now if you are unhappy with the monetary system you are automatically a crypto bro and can be dismissed? Secondly, the problem with fractional reserve banking is as follows: Suppose Larry makes a deposit of one dollar, which the bank guarantees can be retrieved at any time. The bank loans this dollar to Catherine, which uses it to buy something from Steve. Now Steve has one dollar, which he deposits with the bank. The bank lends this dollar to Catherine2, which uses it to buy something from Steve2. And so on, up to CatherineN and SteveN Now, in so far as transactions can take place in the economy with bank IOUs, which are considered perfect money substitutes, the amount of money in the economy has been multiplied by a factor of N. Where before only Peter had a dollar (or a dollar IOU, which are supposedly the same), now Pere AND Steve, Steve2, up to SteveN all have a dollar IOU. This leads to an inflationary pressure. Now it is true that upon the Catherine's repaying of the debt, these extra dollars will go away. However, in reality there is no such thing as negative dollars. The supply of money has been increased by the bank. An objection could be raised that Catherine's extra demand for money to pay off her debt will exactly offset the extra supply of money. This is nonsense! Everyone demands money all the time. If Catherine did not demand money to pay off her loan, she would demand money in order to satisfy her next most urgent want which could be satisfied by money. The increase in the demand for money is negligible.
- namaria 2y ago
  Your mistake was saying Synapse merely did what banks do. Banks don't lose track of money when they increase the money supply.
  - serbuvlad 2y ago
    My comment was meant as a tounge-in-cheek joke, with a dig at the banking system. It was not meant as a serious equivocation between what Synapse did and what banks do.
- nly 2y ago
  Your explanation of fractional reserve banking is somewhat correct, but missing the big picture Licensed banks can and do write loans at any time without having any deposits to 'lend out'. In doing so they create both the loan (an asset) and a deposit (a liability) simultaneously from thin air. The books immediately balance. The deposit created is then paid to the borrower and the liability vanishes. The bank is left with only the asset - the one that they created from thin air. For short term liquidity a bank can always use the overnight lending facility at the central bank. Doing so just makes all their loans far less profitable as this is at a floating daily rate. In reality the limit to which the money supply grows is not dictated by 'fractional reserves', but solely by interest rate policy and the commercial viability of being able to make loans and demand in the economy.
willmadden 2y ago
The bank IS printing new money. You are ignoring the money multiplier effect where the money lent by bank 1 is deposited into bank 2, bank 2 lends 90% of that deposit, which is deposited into bank 3, ... repeating the process over and over. With a 10% reserve requirement, a 1,000,000 USD deposit will result in up to 10 times that much money being lent out. The formula is 1/r, where r is the reserve requirement.
- ArnoVW 2y ago
  interestingly, the Fed's page on Reserve Requirements states: As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. So in effect, the multiplier is infinity. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
  - gastonmorixe 2y ago
    I remember this. Have they ever rolled it back?
    - neffy 2y ago
      The Basel Capital rules dominate at the moment. If that ever gets rolled back... buy gold immediately.
      - gastonmorixe 2y ago
        Oh ok. So there’s a difference between reserve requirements and capital requirements. Capital requirements are still in place Basel III (Basel Capital Rules) 4.5% among other requirements https://en.m.wikipedia.org/wiki/Basel_III https://en.m.wikipedia.org/wiki/Basel_III
        hgomersall 2y ago
        Basel III also specifies liquidity requirements, which basically means banks need to hold sufficient loan assets in the government or central bank (generally bonds or reserves respectively), which act as a backstop if other banks stop lending to them (i.e. stop accepting deposit transfers without also being given an equivalent asset).
simula67 2y ago
> The bank is not printing money new money, no matter how many times this idea gets repeated by people who are, ironically, pumping crypto coins that were printed out of thin air. It is now widely accepted that bank lending produces new money[1][2] [1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... [2] https://www.youtube.com/watch?v=K3lP3BhvnSo https://www.youtube.com/watch?v=K3lP3BhvnSo
- Agingcoder 2y ago
  Yes. That’s how it was taught to me years ago, that’s how it’s understood in the banking industry as well, incl the private sector. From a large eurozone bank : https://group.bnpparibas/en/news/money-creation-work https://group.bnpparibas/en/news/money-creation-work
- hgomersall 2y ago
  There's an inordinate amount of nonsense being espoused in this thread, when the answer is in that first link. I can only assume it's the miseducation that economics textbooks perpetuate.
jnwatson 2y ago
The "liabilities" aren't subtracted from the deposit amount when counted as M1 supply. (Actually loans are accounted for as assets and deposits are liabilities, but that's beside the point). If customer A deposits $100 in cash, and customer B borrows $100 from the bank and deposits it back in the bank, M1 goes up because there are now two checking accounts with $100 in it. That the bank's internal bookkeeping balances doesn't change the fact that the Fed considers that more money exists.
- gus_massa 2y ago
  I agree. The main point is that if B knows that they don't have to repay the $100 until 10 years in the future, then for the 10 next years everyone can pretend there are $200 in total.
- notahacker 2y ago
  > That the bank's internal bookkeeping balances doesn't change the fact that the Fed considers that more money exists. The Fed considers that more M1 exists and the same amount of M0 exists. Both are considered monetary aggregates, but M0 is the "money" the bank needs to worry about to stay solvent, and it can't "print" that. Whilst it's semantically correct to refer to both M1 and M0 as money, it's pretty clear that it's wrong for people people to elide the two to insinuate that banks are printing themselves balances out of thin air like token issuers or insolvent companies that screwed up their customer balance calculations, which is what the OP was covering. And the Fed wouldn't consider more money to exist if the bank's internal bookkeeping didn't balance...
stackghost 2y ago
>These liabilities subtract from the overall balance stored (reserved) at the bank. The bank is not printing money new money Hi, this is factually incorrect and you should educate yourself before attempting any further condescending comments on Hacker News.
deleted 2y ago
[deleted]
victorbjorklund 2y ago
But Banks are increasing the money supply with fractional reserve bank. But that is of course on purpose and account for by the govt.
throw0101a 2y ago
> In fractional reserve banking, money that is loaned out is accounted for as liabilities. Yes, that is how a fractional reserve banking works. But that is not how the current banking system works. * https://www.stlouisfed.org/publications/page-one-economics/2021/09/17/teaching-the-linkage-between-banks-and-the-fed-r-i-p-money-multiplier https://www.stlouisfed.org/publications/page-one-economics/2... * https://www.pragcap.com/r-i-p-the-money-multiplier/ https://www.pragcap.com/r-i-p-the-money-multiplier/ Banks do not lend out deposits. This was called the "Old View" by Tobin in 1963: * https://elischolar.library.yale.edu/cowles-discussion-paper-series/388/ https://elischolar.library.yale.edu/cowles-discussion-paper-... The Bank of England has a good explainer on how money is created: * 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... See also Cullen Roche: * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 * https://rationalreminder.ca/podcast/132 https://rationalreminder.ca/podcast/132
- notahacker 2y ago
  Money that is loaned out is still accounted for as liabilities. Sure, those liabilities are accounted for in an eventually consistent matter by reconciling imbalances on interbank lending markets at the end of the day with the government topping up any systemic shortfall rather than by counting out deposit coins in the vault But that's fundamentally much closer to the "Old Money" view than to the OP's claim about fractional reserve being like an FBO inflating customer deposits by failing to track trades properly. All the credit extended by the bank is accounted for, and all of it that isn't backed by reserves is backed by the bank's obligations to someone else.
  - throw0101a 2y ago
    > Money that is loaned out is still accounted for as liabilities. To be clear: * Money is "loaned out" in the sense that a bank credits your account. * Money is not loaned out in the sense that which "goes into" your account did not come out of someone else's account. Rather it was created 'out of thin air' by the bank without reference to anyone else's deposits.
immibis 2y ago
In fractional reserve banking, the total deposits at a bank can be greater than the amount of physical money it holds. Since the rest of society is willing to accept bank deposits as an alternative to physical money, this is a form of printing money. Physical currency is not printed, but bank deposit currency (which is money, by de facto agreement) is.
no_wizard 2y ago
I just want the gold standard back. It worked as an actual check on money supply and went implemented properly was harder to manipulate
- dumah 2y ago
  The US Government formerly fixed gold prices by statute and prohibited US citizens from owning or trading gold anywhere around the world. The idea such a system could function in todays world is strange to me.

Shalah 2y ago

@serbuvlad: “When the banks do this it's called "fractional reserve banking", and they sell it as a good thing. :)” How dare you criticize our holy banking system /s