Of course banks are lending deposits. They're throwing in some investor money too but vast majority of loans they write is using deposits. You can try to make some sort of "number on screen go up" argument, btu the underlying value comes from somewhere. When someone takes a loan and withdraws dollars they're usually getting money that was deposited by a customer.
That's a misunderstanding - when a bank originates a loan:
- the bank records an asset (the loan) and a liability (the deposit in the borrower's account)
- the borrower records an asset (the loan money now deposited at the bank) and a liability (the loan)
But is it real? It’s more like an IOU, right? They don’t reduce the amount of money in the depositor’s account, but if the loan defaults would they be able to return the money to the depositor? My guess is no, not really (assuming no other outside cash sources).
So even though the amount of currency looks like it has increased, it hasn’t really… unless I’m misunderstanding still. But my impression is this is pretty much what happened yesterday with SVB.
That's wrong. The loan amount was never anything but a number that someone at the bank punched into a database. It doesn't have anything directly to do with someone else withdrawing their own money.
If the bank is giving cash to the withdrawer, that would come out of their capital reserve I guess. If they didn't have that, they FDIC insurance would kick in.
You’re wrong. If someone took out a loan and withdrew all the money before defaulting the bank would not be able to pay deposits. Insured deposits would be paid by the government and uninsured deposits would go poof.
You can say the loan is a number in a database, but once it’s withdrawn from the bank the bank can’t just go into the database and undo the loan.
Your understanding of banks taking in deposits then lending them out hasn't been true for decades. A bank with no deposits can make loans just fine. They can just borrow at a lower rate than they loan if they actually need to hand out cash.
Your example doesn't make much since because any bank has many good loans and a capital reserve to deal with the few bad loans.
This was basically what I was asking. Okay so, because the bank has access to an external supply of “money”, they can loan out more than they have in reserve. Thanks!
Yes, BUT they do not need to get 1000 USD from anywhere to put 1000 USD in your account. They literally just say you have 1000 USD. You can then electronically transfer that to anyone else's bank. The banks then borrow government money overnight to settle accounts. That's the only place government money comes into it.
Economists actually refer to the USD in your account as bank money because it did not come from the government. You could just as easily think of that money in your account as a bank issued stablecoin pegged to the dollar that's convertible to dollars.
except people withdraw money and the bank needs to give those people actual cash. That's deposits. Of course they could take overnight loans or whatnot but deposits are cheaper.
The vast majority of money is not withdrawn. It's all transfers. And that is a major point and difference.
Also, if it was all withdrawn it's a bank run, which has not been a problem in the US for quite a while.
Overall it cancels out for the large banks, of course people transfer money they just borrowed from the bank away, but that bank also has customers that are recipients of money. That, and other mechanisms between banks and banks and central bank(s) to balance such things within all the banks in the overall economy. Money withdrawn from one bank goes to another one, and everybody is not just sender but also recipient from someone else.
Why do you keep insisting on the "cash"? The by far least important kind of money? First of all everything is just virtual, electronic. Only a tiny fraction - and only temporary! It's not stocked at home, but used to buy something and that means deposited again in another bank - is "cash".
Yes banks need some reserves, but this is waayyyy more complicated than them using the deposits. Which, for the most part, are not cash. That's only that tiny fraction of paper money use din circulation, which also is a lot less than it used to be with all the card-money.
USD is different because that currency is used for far more than just regular circulation, and world-wide. But even then estimates are ca. 8% cash maximum, for the world, which includes a lot less sophisticated economies. A bit more for the USD for obvious reasons, but most of that is not circulating in the US economy.
In any case, even in the US, with all its cards and card payments, money is mostly electronic and not cash and is transferred from bank to bank and hardly leaves the banking system.
> commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise
Uhm.. yes, exactly. They can't do it at will, they need a borrower to sign. I mean, now we start arguing definitions, always a bad sign, especially when both sides actually are in perfect agreement and it's about the words used. This article to me is just weird, arguing it's not out of thin air, while everything being described says just that, only that their understanding of "out of thin air" is subjectively different than that of many other people. But there is no difference in knowledge and opinion about the underlying mechanism, only disagreement about some fuzzy term that some like to use and some apparently hate for whatever reason.
I’m not reading that, but I’m using “cash” because that’s what I’m talking about. Yes most of the loan money isn’t cash, but the cash has to be available for withdrawal so “it’s just numbers on a screen” doesn’t actually work all the way down.
Banks don't hold substantial cash. They send whatever cash they collect to the local federal reserve to be recycled and get fresh cash to hand out to people every morning from the same federal reserve. I don't think I've gotten a "used" bill from a bank in over a decade.
So let's assume a bank has collected deposits worth £1000 from all of its customers. Now the bank makes a loan of £100 to one of its customers and puts the money into the customer's current account at the bank.
According to your theory, what is the total amount of deposits at this bank after making the loan?
If, as you say, banks were lending deposits, then the total amount of deposits cannot possibly have changed and that new loan of £100 would have to come out of some other customer's bank account.
I would be pissed if my bank account balance suddenly dropped and the bank told me, sorry we have lent your money to someone else.
They give your money to that guy. And he puts it in his account at the bank and they give it back to you. The money is still real though. Without the deposits they could not make any loans to begin with.
If someone comes to take out a loan for $1000 and withdraw the money what would happen? They'd go get the money everyone left there and give it to the new customer. Now they bank has no money because they just lent all the deposits. $1100 in deposits and $1100 in loans
“ Without the deposits they could not make any loans to begin with.”
Incorrect, banks create deposits when they issue loans and only require reserve balances sufficient to satisfy net flows of funds between institutions.
They can also borrow those reserves.
So deposits are required to increase profitability, and of course a minimum level of profitability is required to be solvent, but banks in now way “lend out deposits”.
If you actually believe this describes the process then follow me on this thought experiment.
TWB (unrelated to SVB) realizes that it’s in trouble - customers are taking a lot of their deposits out, and confidence in the institution is low.
So, instead of trying to liquidate some of their assets or raise capital (which is what would be conventional) they decide to lend their bank president a trillion dollars of interest free loan with a recall feature, on the contingency that he deposit it in a non-interest bearing account with a 300 year notice requirement.
In your understanding of the mechanics of banking; this is fine. The bank magics $1tn of deposits out of thin air, records an equivalent asset, and can then just pay all of their customers from these new deposits they have.
By issuing deposits, each bank creates essentially its own money which is valid as long as it is inside the bank (used in transactions with other clients that use the same bank), but when clients send money to other banks, the bank has to use 'central bank money'.
Which means banking system as a whole creates 'private money' when flows of 'central bank money' between banks are balanced, but each individual bank cannot do it faster than others, otherwise these flows will be negative and it will be losing 'central bank money' and/or hard assets (which would be sold to acquire 'central bank money').
In your worldview, where does the money a bank needs to operate from?
In your worldview, can you explain how it is possible for a bank to have far more loans on their books than they have deposits (see: fractional reserve banking)?
> A bank can make an infinite amount of loans. They are not constrained by anything.
They are constrained by capital and/or reserve requirements
> The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan.
Nope. Banks can borrow against their government securities from Central Banks by "rediscounting" them during discount windows, should they need extra liquidity. Note that this is not the preferred method since Central Banks usually charges a premium. These are secured loans.
But loans aren't typically available immediately - they take time to clear. It doesn't seem unreasonable to me that they'd bundle the day's loans (or maybe a few hours at a very large bank) to limit the number of transactions they'd have to make.
The money that gets borrowed from the Fed is used to settle balances between banks. When a bank originates a loan, they just add a number to an account. The money doesn't come from anywhere. This works mainly because most money transfers are electronic.
tl;dr yes, banks create money out of thin air. It's been this way for decades.
> can you explain how it is possible for a bank to have far more loans on their books than they have deposits (see: fractional reserve banking)?
Fractional reserve banking is about having more deposits (on the liability side) than reserves (on the assets side).
I won't say that it's not possible for a bank to have far more loans on their books than they have deposits (they could finance themselves differently) but I'm not sure if that actually happens. Can you give an example of a bank having far more loans on their books than they have deposits?
Banks don’t have far more loans than deposits. When they make a loan most of the money is just redeposited, so effectively each oringal deposit gets 10x’d by people just leaving the money in the bank. That’s how fractional reserve banking and “creating money out of thin air” works.
If none of the loan money was redeposited than the bank couldn’t create new money.
You are thinking of a nation - and even a single bank - as a closed system. But this is an oversimplification that makes it impossible for you to make steps in your understanding of how this all works.
I've worked for a bank, both on the 'banking' side and on the IT side. One of the first things that gets drilled into your head is that banks create money. With every loan on the books more money gets put into circulation. There are some restrictions on how much you can put into circulation and there are some restrictions on how much cash you have to have on hand compared to the number of deposits that you have lying around.
But a bank could easily (as long as the bank is 'solvent' according to the rules set by the local central bank) write loans well in excess of it's deposits, technically it need not have any deposits at all.
