"To the penny. Capital plus deposits equals loans." Ok sure. Am just trying to understand how does Fractional Reserve banking fit into this equation ?... if a bank only has to keep say 10% of deposits on hand (for examples sake) then isn't it creating Money/credit with the other 90% that ends up as a 100% loan on the other side of the ledger?
You're missing the timing issue. Sure, the bank creates credit by advancing a loan. That's what creating credit means. But they must attract a deposit to match that loan by 4.30 pm that day.
2) so what defines the capital in your equation ? "Capital plus deposits equals loans." which is also just Equity (Capital) = Assets (Loans) - Liabilities (Deposits)
What are the sources of Equity/Capital in lending/banking other than trading profits and initial shareholder capital ?
3) so profits are essentially an arbitrage between interest on loans in - interest paid on deposits less opex = profit ( for simplicity sake where loans always equals deposits)
Back in 1994 I'd sold and moved out of my house but the folks I was buying from were a little later in the process. I needed the cash on hand as they were likely to be able to proceed in days so I had a quick call to Barclays each day to put the house equity into an overnight Treasury Bond. I recall the interest (on an annual basis) was sixteen and seven eighths percent. They certainly acted liked they wanted my deposit.
Great post ! MMTers are a real threat to financial stability .Considering the inflation wave we have just had ,caused by excess Monetary Demand (MV) ,you would have thought they would be hiding behind the couch . However , they have become emboldened , blaming erroneous Cost Push pressures on inflation , like the illogical Keynesians .
"This is what makes “lending by a bank is unrelated to the deposits it takes from savers” the purest and most unmitigated tosh. "
"The answer is that the entire concept is unmitigated tosh. Banks require deposits to finance their loan books, that’s why they pay interest on deposits. QED. " Quite right !
I've had many arguments with #MMTers over the same .
2 points
"Banks lending is a huge influence on the size of V" This confused me as I think you mean M (M3/4 to be clear) not V ?
Also Northern Rock wasn't "bankrupt " it was illiquid , I am not being picky ,but it is important to point out, that if the BoE had acted as LOLR, (its job) it had sufficient capital to maintain viability . Cheers Tim
"Also Northern Rock wasn't "bankrupt " it was illiquid , I am not being picky ,but it is important to point out, that if the BoE had acted as LOLR, (its job) it had sufficient capital to maintain viability ." Well, yes and sorta. I agree N Rock wasn't insolvent (I have discussed this directly with Matt Ridley). And I've long made the point that N Rock wasn't insolvent, often by pointing out that the Granite mortgage bonds have continued to pay off and that unfinanced loan book was in fact sold for a profit. I agree Rock was illiquid, not insolvent that is. But for a bank they both mean it's bust, bankrupt. For a bank can be bankrupt by being insolvent or illiquid.
Yes agree and in fact that was the case , I just thought it worth pointing out that it was as much , if not more ,a Bank of England failure to do their day job as it was NR overstretching themselves. The BOE , with their New Keynesian model are continually failing our country & it seems always beyond reproach .
Thanks, a very clear description and I - having worked briefly in a bank 40 years ago (savings bank clerk, then trading bank clerk) - can attest to that balancing procedure - we closed at 3.30pm, so the sums started around 2.30pm.
But why then can my bank (in Ireland) get away with not paying me interest on my deposits (savings not current a/c) for most of the last ten years? And now continue to get away with paying a pittance (< 0.5%) even when mortgage rates have gone up significantly?
Slightly surprised to learn that the AIB, for their current account, don't mention an interest rate at all - it's predominately flogging the app. By contrast, Santander and Starling in the UK offer 3.25-3.50% (T&Cs etc, etc).
So, do Irish banks have a history of not offering a rate on current accounts?
UK banks didn't until after the '81 budget, when they got hit with a 2.5% windfall tax;
"The question now was whether to levy a windfall tax on bank profits. Naturally, the banks strongly opposed this; but the fact remained that they had made their large profits as a result of our policy of high interest rates rather than because of increased efficiency or better service to the customer."
"In 1981, the Government was in desperate need of revenue and the banks were unpopular. By paying no interest on current accounts they made a fortune as the Government pushed base rates as high as 17 per cent to choke off inflation."
Robert Chote in the Independent on Sunday, 1994, taken from;
No, there's never been interest paid on current accounts. Instead they charge you fees. The best it ever got was in the boom years (late,90s through early 2000s) when banks vied to offer current a/c's without fees !
The past 10 years have seen interest rates on the floor as a result of QE. So, deposit rates have been terrible. Like, as you say, zero. Now that rates are rising deposit rates are too. But don;t forget that euro base rates are still pretty low. I've just sold a flat, have the cash in hte bank while I organise to buy the next. And deposit rates here in Portugal are also near zero. Because base rates are still low.
Bank runs also occur when banks (hello SVB!) have large chunks of their resources held as assets that decrease in value. In SVB's case that was long maturity bonds and MBSes that declined in value as interest rates rose.
I'm sure that MMT has a way to cause that not to be a problem by having the bank print money when the depositors want their deposits back. And it's just weird how that wasn't what happened in real life 10 months ago
"To the penny. Capital plus deposits equals loans." Ok sure. Am just trying to understand how does Fractional Reserve banking fit into this equation ?... if a bank only has to keep say 10% of deposits on hand (for examples sake) then isn't it creating Money/credit with the other 90% that ends up as a 100% loan on the other side of the ledger?
You're missing the timing issue. Sure, the bank creates credit by advancing a loan. That's what creating credit means. But they must attract a deposit to match that loan by 4.30 pm that day.
ok,1) thanks for replying :)
2) so what defines the capital in your equation ? "Capital plus deposits equals loans." which is also just Equity (Capital) = Assets (Loans) - Liabilities (Deposits)
What are the sources of Equity/Capital in lending/banking other than trading profits and initial shareholder capital ?
3) so profits are essentially an arbitrage between interest on loans in - interest paid on deposits less opex = profit ( for simplicity sake where loans always equals deposits)
Now you're getting too complicated for me......
Back in 1994 I'd sold and moved out of my house but the folks I was buying from were a little later in the process. I needed the cash on hand as they were likely to be able to proceed in days so I had a quick call to Barclays each day to put the house equity into an overnight Treasury Bond. I recall the interest (on an annual basis) was sixteen and seven eighths percent. They certainly acted liked they wanted my deposit.
Great post ! MMTers are a real threat to financial stability .Considering the inflation wave we have just had ,caused by excess Monetary Demand (MV) ,you would have thought they would be hiding behind the couch . However , they have become emboldened , blaming erroneous Cost Push pressures on inflation , like the illogical Keynesians .
"This is what makes “lending by a bank is unrelated to the deposits it takes from savers” the purest and most unmitigated tosh. "
"The answer is that the entire concept is unmitigated tosh. Banks require deposits to finance their loan books, that’s why they pay interest on deposits. QED. " Quite right !
I've had many arguments with #MMTers over the same .
2 points
"Banks lending is a huge influence on the size of V" This confused me as I think you mean M (M3/4 to be clear) not V ?
Also Northern Rock wasn't "bankrupt " it was illiquid , I am not being picky ,but it is important to point out, that if the BoE had acted as LOLR, (its job) it had sufficient capital to maintain viability . Cheers Tim
"Also Northern Rock wasn't "bankrupt " it was illiquid , I am not being picky ,but it is important to point out, that if the BoE had acted as LOLR, (its job) it had sufficient capital to maintain viability ." Well, yes and sorta. I agree N Rock wasn't insolvent (I have discussed this directly with Matt Ridley). And I've long made the point that N Rock wasn't insolvent, often by pointing out that the Granite mortgage bonds have continued to pay off and that unfinanced loan book was in fact sold for a profit. I agree Rock was illiquid, not insolvent that is. But for a bank they both mean it's bust, bankrupt. For a bank can be bankrupt by being insolvent or illiquid.
Yes agree and in fact that was the case , I just thought it worth pointing out that it was as much , if not more ,a Bank of England failure to do their day job as it was NR overstretching themselves. The BOE , with their New Keynesian model are continually failing our country & it seems always beyond reproach .
Thanks, a very clear description and I - having worked briefly in a bank 40 years ago (savings bank clerk, then trading bank clerk) - can attest to that balancing procedure - we closed at 3.30pm, so the sums started around 2.30pm.
But why then can my bank (in Ireland) get away with not paying me interest on my deposits (savings not current a/c) for most of the last ten years? And now continue to get away with paying a pittance (< 0.5%) even when mortgage rates have gone up significantly?
Slightly surprised to learn that the AIB, for their current account, don't mention an interest rate at all - it's predominately flogging the app. By contrast, Santander and Starling in the UK offer 3.25-3.50% (T&Cs etc, etc).
So, do Irish banks have a history of not offering a rate on current accounts?
UK banks didn't until after the '81 budget, when they got hit with a 2.5% windfall tax;
"The question now was whether to levy a windfall tax on bank profits. Naturally, the banks strongly opposed this; but the fact remained that they had made their large profits as a result of our policy of high interest rates rather than because of increased efficiency or better service to the customer."
https://www.margaretthatcher.org/document/110696, or
"In 1981, the Government was in desperate need of revenue and the banks were unpopular. By paying no interest on current accounts they made a fortune as the Government pushed base rates as high as 17 per cent to choke off inflation."
Robert Chote in the Independent on Sunday, 1994, taken from;
https://researchbriefings.files.parliament.uk/documents/SN00338/SN00338.pdf
Also, as I say, Euro rates are well below sterling at present....
Bear with me...
No, there's never been interest paid on current accounts. Instead they charge you fees. The best it ever got was in the boom years (late,90s through early 2000s) when banks vied to offer current a/c's without fees !
The past 10 years have seen interest rates on the floor as a result of QE. So, deposit rates have been terrible. Like, as you say, zero. Now that rates are rising deposit rates are too. But don;t forget that euro base rates are still pretty low. I've just sold a flat, have the cash in hte bank while I organise to buy the next. And deposit rates here in Portugal are also near zero. Because base rates are still low.
Bank runs also occur when banks (hello SVB!) have large chunks of their resources held as assets that decrease in value. In SVB's case that was long maturity bonds and MBSes that declined in value as interest rates rose.
I'm sure that MMT has a way to cause that not to be a problem by having the bank print money when the depositors want their deposits back. And it's just weird how that wasn't what happened in real life 10 months ago