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

> Really? The very first comment I replied to was: "banks at least tell you they are loaning your deposits out"

Hmmh, you're right, that claim has been made. Also I acknowledge that I have phrased some sentences ambiguously. Specifically this one that you dug up:

> > "No, when you take a loan out of a bank, the bank doesn't "create deposits" that it loans to you. The bank loans you existing deposits"

> Are you saying there's a distinction between "banks loan you existing deposits" and "banks lend out reserves"? They seem to be the same statement to me ...

No, I wasn't trying to make that distinction in this context (in another context we were discussing a hypothetical of a newly-founded bank which might have a lot of reserves even before it has depositors, and in that context that distinction is meaningful).

I was making a distinction between the act of writing numbers on a computer, and the act of taking money out of a bank. Note that my sentence began with these words: "when you take a loan out of a bank". When I say "out", I'm referring to a cash withdrawal or bank transfer to another bank. When you withdraw your loan out of the bank, the bank needs to spend some reserves in order to settle the transfer.

You made a point that sometimes the bank acquires those reserves AFTER it issues the loan, and I take your point. You also made a point that the bank might fraudulently acquire those reserves, I accept that as well. My point wasn't really focused on when the reserves need to be available for the bank, or how the reserves were originated (deposits vs fraud vs selling off assets vs ...). My point was that when you take money out of a bank, the bank can't fake it. It needs to have some stuff that it can't make up out of thin air, and after you take that stuff, the bank no longer has that stuff.

> You could, if you wanted to, have a bank that capitalised entirely with reserves, but it's way more profitable to attract reserves, lend them out to other banks who have attracted less reserves, and buy bonds with said reserves. You can use the loans you made yesterday to another bank as collateral to borrow at the discount window, for example, if you find yourself in your own liquidity crunch.

I take your point that a bank's capital mix can consist of many different kinds of assets and reserves play only a small part. We can continue this by discussing the relationship between the bank's capital and its ability to issue loans, since that is a more accurate way of describing things.

> Right so what you could say is there's definitely a "credit limit" [...] Fed would give you a call and be like "ummmm ... no" [...] But "having reserve deposits" is not a pre-requisite for originating a loan. Banks can (and do!) get away with somewhat subtler forms of control fraud over a period of time that is not really that long (2 - 3 years, say) during which time executives can stash an enormous amount of cash and just leave the mess for the regulators to clean up.

Awesome. It sounds like we agree.

Listen, I've enjoyed this discussion so far, and I learned some things I didn't know beforehand, but it's time to call it a day. If you feel that we still disagree on some substantial points, I'd like to hear you hash it out in the form of "this is my opinion, and here is how that's different from your opinion" (articulate not only your own point of view, but also the opposing point of view, and how it is different from yours). I suspect that we're actually in agreement of all substantial points, while we might somewhat disagree on minor things like definitions for words or how easy it is to swap fake money to yachts.

Imagine the second largest bank in your country just up and dissolving with everyones money - that is exactly how this feels to those of us who have been in this space a while.