10 ms·
This is not correct. For starters, loans are assets. Banks start with some capital, borrow in the form of deposits, and lend in the form of bonds, mortgages et
by jbs789 9mo ago
This is not correct. For starters, loans are assets.
Banks start with some capital, borrow in the form of deposits, and lend in the form of bonds, mortgages etc.
The regulatory capital ratio determines how much capital they must hold to support the assets.
- staplers 9mo agoLoans are assets -1 = 1 And people wonder why finite natural resources skyrocket in value.
- littlestymaar 9mo agoFor every debt there's a debtor and a debtee. For the first debt is a liability, while it's an asset for the second.
- staplers 9mo agoand liabilities are always paid back in full and never smoothed over with money printing bailouts.
- littlestymaar 9mo agoI don't understand the point you're making. All kind of assets can lose value overnight, be it stocks or real estate.
- staplers 9mo agoLending on no reserve secretly doubles the money supply, sometimes even more if repackaged multiple times. It creates a highly risky financial environment that taxpayers inevitably are forced to bailout (usually through layoffs and hyperinflation). Time and time again.
- immibis 9mo agoIt's crazy how far you just tried to change the subject. At first you were claiming loans aren't assets, which is uncontroversially wrong. Now you're claiming lending creates money, which is a completely different statement, and uncontroversially true
- somewhereoutth 9mo agoThe best way to understand a loan is as the right to a future income stream (principal repayments and interest). The original debtor (the person/entity taking out the loan) establishes the credibility of that future income stream (based on income, expected returns on a project, etc) and sells it to the lender (usually a bank) for cash up front. Thus the loan is an asset on the bank's balance sheet, that is generating returns (assuming all goes to plan). Banks can and usually do sell on that asset to other parties. Conversely, when you deposit cash to a bank, you are actually creating a liability on the bank's balance sheet - as you might want your money back one day!
- staplers 9mo agoAnd bankruptcies never happen and no money is created to bailout the lenders
- eru 9mo ago> The regulatory capital ratio determines how much capital they must hold to support the assets. That's one of the factors. But even in jurisdictions without regulations on capital ratio, banks tend to hold capital cushions. The Scottish 'free banking' era in the 18th and 19th century is instructive here. (Canada had a similar arrangement.) In Scotland during that time banks regularly had about 2/3 deposits and 1/3 capital to finance their balance sheet, despite no fixed regulatory obligations on capital ratios. Interestingly they barely held any reserves at all, perhaps 2% or less of assets. These banks were extraordinarily solid and stable. And the arrangement contributed to Scotland's rapid catching up to England during their Industrial Revolutions.