51–60 of 68 posts
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This used to be true, but hasn't mattered for a long time. The reserve requirement is zero for most (all?) US banks. https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Strange that private companies are allowed to create money from nothing don't you think?
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That is not how fractional reserve banking works, people - or, to me at least, it gives a wrong impression. Say we are in a fractional reserve banking system, where the required reserve is 10%. I deposit $1M at the bank. My bank can now lend $900K to you. You can now deposit $900K back at your bank. Your bank can now lend $810K to someone else, and so on and so on. The geometric sum of this is "1/reserve_ratio"; so i…
This used to be true, but hasn't mattered for a long time. The reserve requirement is zero for most (all?) US banks. https://www.federalreserve.gov/monetarypolicy/reservereq.htm
So, JPM needs more equity if it wants to ramp up it's loans.
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Simple, but completely wrong. The bank never loans your money. When it wants to originate a loan it creates new deposits from nothing.
The reality is actually significantly worse than what parent comment posits. Money gets created out of thin air frequently in banking, it's quite the scheme / sham. Learning more about how the financial system works is usually upsetting, and in surprising ways. The entire business has a certain ring and scumbag scent to it.
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Strange that private companies are allowed to create money from nothing don't you think?
That's how it has been for a while, as the bank of England paper explains. The key is that the bank is "on the hook" for being able to get that money back eventually. So they don't just loan indiscriminately.
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Strange that private companies are allowed to create money from nothing don't you think?
It’s the defining characteristic of a banking license. Like any license it permits activity that would otherwise be illegal. In this case, creating new dollars.
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Simple, but completely wrong. The bank never loans your money. When it wants to originate a loan it creates new deposits from nothing.
Correspondent banking just seems messed up at the incentive layer... Seems like there is an incentive for banks to just credit free money into each other's accounts... Surely they can create lots of smaller (low profile) banks with accounts all over the place then use this mechanism to print free money for themselves to expand the money supply ad-infinitum. The attack surface is massive. With the same money being loa…
You and I could create IOUs to each other out the wazoo. You owe me $10 mill. It's an asset to me. I owe you $10 mill, it's an asset to you. You and I could go around saying we have $10 mill each in assets. It's not even a lie.
It's why when you enter into a contract for a loan from anyone sensible they want to see your assets and your liabilities. Because our little game above resulted in a net change of 0 for each of us.
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Why post something that was explained as incorrect by the Bank of England in 2014?[0] Where did you pick this misconception up from? [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
This is a pretty awful doc. While technically it's not wrong , it doesn't continue to follow the flow long enough. The example given of "creating money" by creating a balance in someone's account is meaningless. In practice, the money is almost immediately sent to... the seller of the house. They may then go pay off their mortgage at their bank... and nothing much has changed. I can "create money" too, out of thin ai…
Yes you do. Because it is just an internal transfer within the bank. From your account at the bank, to the sellers account at the bank.
If it is to another bank, then that destination bank becomes a depositor in the source bank, which creates a loan to the source bank and a new deposit for the seller is created in the destination bank.
The destination bank does this otherwise the seller will move their bank account in disgust to the source bank - who does promise to complete the transfer.
All very simple and the way it has been done for centuries.
It's all loans create deposits - book entries.
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This is a pretty awful doc. While technically it's not wrong , it doesn't continue to follow the flow long enough. The example given of "creating money" by creating a balance in someone's account is meaningless. In practice, the money is almost immediately sent to... the seller of the house. They may then go pay off their mortgage at their bank... and nothing much has changed. I can "create money" too, out of thin ai…
"Do I have enough assets so I can in fact send the money to the seller of the tractor you just purchased?" Yes you do. Because it is just an internal transfer within the bank. From your account at the bank, to the sellers account at the bank. If it is to another bank, then that destination bank becomes a depositor in the source bank, which creates a loan to the source bank and a new deposit for the seller is created…
Sorry, this isn't how it works. To transfer to another bank the banks will adjust central bank balances. Look up how ACH works behind the scenes, or the equivalent in other jurisdictions.
As for "centuries", again, no. Clearing houses - look them up.
In general - if something sounds magical in finance, you have to dig deeper. There is no magic anywhere.
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"Do I have enough assets so I can in fact send the money to the seller of the tractor you just purchased?" Yes you do. Because it is just an internal transfer within the bank. From your account at the bank, to the sellers account at the bank. If it is to another bank, then that destination bank becomes a depositor in the source bank, which creates a loan to the source bank and a new deposit for the seller is created…
How do you know if I have enough assets? I'm just some random finance source. Sorry, this isn't how it works. To transfer to another bank the banks will adjust central bank balances. Look up how ACH works behind the scenes, or the equivalent in other jurisdictions. As for "centuries", again, no. Clearing houses - look them up. In general - if something sounds magical in finance, you have to dig deeper. There is no ma…
You have enough assets because you've just created a loan of precisely that amount secured against physical collateral. That's the asset.
Therefore I can take over the deposit you have created knowing I can claim against that collateral in the final analysis.
And therefore I can create a deposit for my customer of the same amount.
That's just wholesale deposits.
"To transfer to another bank the banks will adjust central bank balances. "
That's merely a collateral optimisation.
First understand how correspondent banking works, then move to central bank clearing houses.
You'll find that a central bank is nothing more than banks swapping net liabilities with each other. The end result will always be that banks will lend and borrow from each other, and they do that or they lose customers.
A central bank has to accommodate the clearing process, or it can't maintain its interest rate. It can only set price or quantity, not both.
There's no magic, just the fact that a set of banks have pegged their liabilities to each other and one of them acts as a clearing house. It's all just loans and deposits within that.