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Comment by nostromo | Hacker News Reader

Business idea: take in cash deposits. Hold the cash as paper currency in a vault. Avoid negative interest rates. After you build up enough deposits, start making loans to make money. Maybe if you make good loans you could even pay some interest to your depositors. I’ll call it “Bank.”

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Ok, so how are you making money to sustain your operation? Presumably you are a business, not a charity. Your vault isn't free, neither is the land it sits in, and as you gain more customers your security costs are going to increase. Also your customers are going to want convenient withdrawal and deposit options, so you will need multiple vaults in different locations (plus security measures). Not to mention the overhead you'll need to run this business (accountants, HR, IT, asset managers, etc). Thus there is a degree of scaling to your costs. This is fine though, just subtract these costs from the revenue generated by your investments. Your simplified business model looks something like this:

Profit = Investment Returns - Operational Costs - Interest Paid to customers

Only you have to have sufficiently liquidity such that your customers can get withdrawals whenever they want. This means your investment pool is going to be conservative, thus limiting your returns. Now what happens when your nation's central bank craters interest rates, thus driving your investment returns down? Oh shit, now the revenue source is drying up. What gives? Profit, or your interest rates? Well profits have to be at minimum high enough to justify all this effort, so looks like the interest rates are going to drop and drop and drop as the cost of money goes down....

Congratulations, you are now in the same place as all those other institutions. Who would have guessed that an identical business model subjected to all the same economic push and pulls would end up at the same destination.

Simple... digitize the dollars, e.g. through some crypto token. For every 1x physical dollar on hand, I will create 8x-30x crypto dollars to lend out and earn interest. I shall call this a "fractional reserve" system.

> For every 1x physical dollar on hand, I will create 8x-30x crypto dollars to lend out and earn interest

That's not how fractional reserve works. Banks are money multipliers because loans are deposited again. Eg one person saves $100, someone borrows $95 - then deposits it again, so the bank can make a new loan of $90 etc etc

When a bank loans 10,000 dollars, the amount is credited to a checking account. It does not have to come from somewhere else. What use would a loan be if you kept it in your checking?

Don't take my word for it, take it from the Bank of England's Quarterly Bulletin [0] "Banks create create additional broad money whenever they create a loan... it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have. In fact, Loans create deposits, not the other way around."

[0] https://youtu.be/CvRAqR2pAgw

Money creation happens when the money is deposited and loaned again

me -> deposit $100 in bank a -> bank a loans $95 to business -> business deposits $95 in bank b -> bank b loans $90.25

This loop repeats indefinitely until we're talking about fractions of pennies. The reserve ratio (and bank willingness to loan up to that ratio) determines the money multiplication effect. No bank is loaning more than it's actual deposits, it's just the effect of the same dollar getting deposited and loaned multiple times.

Except it doesn't have to be more than one bank, just different accounts at the same bank. So if a bank creates a loan, which ends up deposited in another account, their deposits have increased from $100 to $195. So the question becomes, where does the money that has increased the banks' reserves come from? It was created when it was loaned.

Maybe we are saying the same thing, I can't tell.

Yes that is what I was saying. I'm trying to dispute the myth that a bank gets a deposit and lends out 10x as much that it magically creates.

Is that what you were saying? Because I'm trying to disagree with you. You seem to say that banks are not magically creating 10x money, that it only lends out money that was previously deposited. This is not the case.

They're lending 95% of their deposits or whatever the reserve requirement is. It's just that every other bank is too, and when they loan money it almost always ends up back in the banking system just in another account. The money creation is an artifact of the same dollar getting deposited and loaned multiple times.

We agree that the amount of loans roughly matches the amount of deposits. Lots of people (like beambot I believe) think there are 10x more money lent out than deposits.

Nope. GP said that storing money was expensive. I was simply alluding to the fact that (a) supply of physical dollars << assets on the balance sheet - i.e. fractional reserve, and (b) a trusted authority can 'print' money on demand so long as people have faith in its viability - i.e. central banks & federal reserve.

Bank financing is counterintuitive: deposits are actually liabilities, and loans are assets... but banks also routinely borrow money (e.g. from the Fed) well in excess of their book value. For example, JP Morgan's current debt-to-equity ratio is 1.675 [1], meaning that they are also (in a sense) "mortgaged" well beyond their net assets. It's debt all the way down...

[1] https://ycharts.com/companies/JPM

Thanks I've been working in banks for 25 years now and have an accounting degree. JPM debt equity ratio is about 12. They're supposed to be highly leveraged, that is how banking works.

It's exactly how fractional reserve works. That it can happen more than once due to redepositing (in other banks, and so on...) doesn't help an argument against that reality.

You may have missed the memo that went out in 2008 regarding how banks like to do things in general. A kind of "statement" regarding their ethics and base principles.

The inventor of Bitcoin didn't miss it, and created a slightly better system that was at least based on something: pointlessly throwing energy away.

Did quite well at proving the concept, it's worth trillions at the moment. So it seems to work. In fact, those old banks might want to start up their own. You know, to compete.

Ah, the exciting world of finance.

As far as I know, that’s not how banks make loans. They don’t lend deposited money, the money they lend is created out of thin air.

No, he's right, that's the theory behind fractional reserve banking.

At a 10% bank reserve rate, 10x the monetary base is created.

Except fractional reserve banking is an incorrect model of how banks work, the poster you're replying to is correct, banks create money when they make loans. The Bank of England's guide to money creation makes this distinction clear on the first page, it's worth a read,

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

Edit via comment: I was drawing parallels to the system of central banks & Federal Reserve (i.e. those that create monetary supply), not just individual banks. The point was simply that physical dollars on hand << assets on balance sheet.

At least with a crypto system, we would (theoretically) be able to account for all the tokens issued... Case in point: "Holding U.S. Treasurys? Beware: Uncle Sam Can't Account For $21 Trillion"

https://www.forbes.com/sites/kotlikoff/2019/01/09/holding-u-...

It's all immaterial anyway; someone already beat me to the punch: USDT, USDC, etc.

All that does is potentially reduce your overhead costs, not eliminate them. You will always have some costs associated with running your operation, and therefore could always be forced to have negative interest rates if stable investment returns plunge lower. And they can always go lower, even negative

> to lend out and earn interest

Who are you lending to? That’s the key - there’s a ton of money looking for returns but not enough people looking to borrow.

You could charge people money to hold their money. You know, like some banks do.

That's the same thing as negative interest rate, just by a different name. A flat-fee is effectively a negative interest rate that scales lower as balance is higher. Calling it a fee or a negative interest rate; that's all just marketing.

It's not all marketing for the exact reason you state, it doesn't scale with the balance but is fixed. A flat-fee would be interesting for precisely the account holders with a large balance. There would be a bank-run-exodus of large accounts to such an impossible flat-fee bank.

I know you're being funny, but for most of history real (as opposed to nominal) rates of return on cash have been negative. Sure, you wouldn't be paying the bank interest, but you'd be paying for storage, security if you have enough, losses on rodents eating your cash, etc. Positive rates of return are actually quite a new phenomenon.

Regulations require you to buy government bonds, you can't hold much cash. European safe govt bonds all pay negative rates. Plus Europe is awash with cash so its hard to make loans. Just another reason all Euro banks are struggling.

Small problem with that.

Banks don't loan out deposits. Banks create deposits by issuing loans.

So to start a Bank you don't need any deposits, and in a negative interest rate environment you don't need to chase them. Deposits backed by 'cash' will automatically come to you in the backfill process (which is how the deposits created by loans can be used to pay people at other banks).

That's how negative interest rates stimulate loans.

Better idea: borrow as much as they'll give you. Get paid for that. Also invest borrowed money in the highest return/largest etf you can find.

Note that most of the companies in said ETF are also doing this.

> After you build up enough deposits, start making loans to make money.

Downturn hits. Depositors want to withdraw more money than you've kept around. You start trying to delay withdrawals long enough to satisfy them with the upcoming loan payments. Some of those payments start to be late. More people start demanding that you give them all their deposits back. Eventually get arrested, tried and jailed for running an unregulated, uninsured wildcat bank.

That's when you borrow money from all your competing banks that are offering negative interest rates, pay off your depositors, and profit from the interest.

You'll still have to fulfil minimal required deposits with the central bank (but my understanding was that they are free of charge).

After that, what will you do if you can't make enough money from loans for your employees (including yourself) and your other expenses?

Yes, only that doesn't work. You are discounting the influence of regulators and the central bank. What you are proposing would be illegal under the current European financial oversight model.

Banq (Bunq is taken already)

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