FTX tapped into customer accounts to fund risky bets, setting up its downfall

> Can you describe how a bank uses money that it has to originate loans?

Yes.

If I take a loan out of a bank in physical banknotes, then the bank physically loses the amount of banknotes that I physically receive. Physical banknotes are not duplicated. If I take out 100 euros in physical banknotes, then the bank loses the corresponding 100 euros in physical banknotes. The bank does not magically create physical banknotes out of thin air.

If I take a loan out of a bank in the form of electronic transfer to another bank, then usually one of 2 things happen:

1. The receiving bank requires the sending bank to settle all transfers that occurred throughout a timespan such as 1 day, by transferring reserves held at the central bank. For example, if the net outflow from bank A to bank B is +2M, then bank B would require bank A to transfer 2M of reserves to settle the transfers. Note that also in this case bank A loses the amount of money that it lent to me. Money wasn't duplicated. It was transferred out of the bank.

or

2. The receiving bank B has looked through the books of sending bank A, they have a prior relationship, and bank B provides an unsecured loan to bank A. Note that if bank A actually had 0 money anywhere, then bank B wouldn't want to provide bank A an unsecured loan. In this case bank A does not lose physical banknotes, and does not lose reserves held at the central bank, but they still have to record the unsecured loan. In an accounting sense, they didn't magically gain "free money" by providing a loan to their customer.

> This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out

I believe this is referring to the creation of the accounting entry. It's true in the most pedantic sense, which is incredibly misleading and unhelpful. Yes, when you type a number into a computer, you can type any number. If I were to open a business where I operate like a bank, taking deposits from people and loaning money to people, and I were to keep a ledger of how much money each person has at their "accounts" with me, I could type any number I want in that ledger. Let's say I type in "9999999999999 dollars". Sure, why not. If your argument is that one can type in any number they want on a computer, then that's true, but it's not a useful argument to make.

Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services.

Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?

Some banks care about collecting deposits because the interest they earn on short term paper is more than the interest they pay on deposits. Some banks don't accept deposits at all -- these are called investment banks.

Also, banks don't really do a lot of maturity transformation -- there are so many myths about how banks operate -- if you look at a bank's balance sheet, you will see a range of short, medium, and long term debt that is constructed to roughly match their short, medium, and long term assets.

Rather, banks make money off of spreads, because banks have lower funding costs than their customers, due to a web of in house expertise, government guarantees, access to special lending facilities and payment networks that others can't access.

If you want to really understand banks, you should stop talking about deposits, which aren't particularly important, and instead focus on mortgages, which dominate the entire financial industry. If you want to buy a house, you could try to sell a bond into the bond market. But a household will have a hard time selling a bond. So they go to a bank, which performs its own credit analysis and then gives you a loan while they sell a bond. The interest you pay to the bank is more than the interest the bank pays on the bond. Banks make money off of this spread, which is small, but it is leveraged, so the total return on capital for the bank is high.

If you don't like it, you are welcome to try to fund your house purchase by selling your own bonds for a lower rate than what the bank charges you. Try crowdfunding your house purchase and skip the bank! Doing that will be an educational exercise that will clarify how banks make money -- it has nothing to do with funny business about deposits, and everything to do with banks having access to capital markets that the Smith household does not.

Most banks basically just break even on the deposits, given the costs of owning all those branches, paying the tellers, etc. Even if they make a profit, it's a small profit, but it's a great way to upsell other financial services (mortgages, auto loans, lines of credit) that make money for the bank, as well as charging fees, etc.

But they don't need your deposit in order lend someone else money, because they borrow from the capital markets at one rate, and lend at a higher rate, and this has nothing to do with borrowing short term and lending long term. Rather, the primary risk for banks comes from leverage.

Yes, I know. I used the term Bitcoin as a syndoche for cryptocurrencies as a whole, because the parent commenter used the term Bitcoin.

> The older I get, the more I find myself making spelling mistakes based on word pronunciation. Sometimes I use a totally different word than what I was thinking, which makes absolutely no sense unless you read it aloud. Then you realize what happened. Hopefully it is not early onset dementia. Though it would not be -that- early.

I think it isn't, and suspect we all have such quirks, especially at the interaction of writing and sound. I occasionally find, for no clear reason, that when I am trying to say a color name I will instead say another color with the same first letter (e.g., if I meant to say 'green', then I will sometimes say 'grey' instead). I am not so young either, but I have done this for as long as I can remember, and don't think I suffer from dementia ….