and folks wonder why banks are so strictly regulated... no, banks are never sitting on too much cash unless they've made a marketing and/or an operational error. most banks are highly levered, meaning they're lending out, say, 10× the cash they hold, so they never "have too much cash on hand". quite the opposite. banks continually lobby regulatory agencies to raise their leverage thresholds so they can lever up even more and rake in more of that sweet, nearly risk-free[0] cash flow.
that they don't raise savings rates is purely out of greed, not necessity. they're also under no competitive pressure to do so, which indicates a malfunctioning market (functioning markets are by definition competitive). and more galling, they charge you hidden fees out the wazoo for the "privilege" of banking in a mine field.
banks are core infrastructure, much like roads and housing. i'd rather go back to a simpler form where banks were only allowed to make money on the spread between lending and savings rates, making them boring and having to compete (with higher savings rates, for example) for your business. all the risk-taking extensions to banking can still exist, just in a separate, firewalled entity with no access to that (nearly) risk-free cash flow.
[0]: risk-free in the finance sense of being free of idiosyncratic risk, not systemic risk.
Banks are awash in reserves and in the basel3 regime these reserves fulfill a similar role to cash in fulfilling bank balance sheet construction requirements. so the banks are not constrained from a lending perspective by a lack of cash and therefore have no incentive to raise rates to attract new deposits to create a base to lend off of.
so from the perspective of why rates are low, it's absolutely because banks are sitting on a lot of cash.
https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legisla...
There's also Green Dot Bank which is what Apple Pay uses among other mobile payment systems. They technically have a single physical branch but you don't ever need to visit it in order to open a savings/checking account with them:
The US government was very quick to save the banks who caused the problem, and today they're even bigger. While people who were conned by the lenders were left on the hook.
This is why I said "meaningful regulation". Having lots of petty laws you have to comply with isn't meaningful regulation. Preventing them from being arbiters of the economy would be meaningful. Breaking them up such that even half of them failing wouldn't tank the economy would be meaningful.
>They can't do really anything without asking for permission or following exact steps spelled out in FDIC/OCC/Fed rules.
If that's true, how were they able to invent "financial instruments" on the fly to contain whole tranches of sub prime mortages, which their pet rating agencies then gave AAA ratings? How were they able to bet against their clients? And insure these things they knew to be garbage, and then profit from that too? Why did Eric Holder declare them "Too Big to Prosecute" (https://www.huffpost.com/entry/eric-holder-banks-too-big_n_2...)?
That whole debacle proves that "can't do really anything without asking for permission or following exact steps spelled out in FDIC/OCC/Fed rules" is flatly false.
We're worse off in terms of Too Big to Fail / Prosecute today than we were in 2007 too.
Hence "no meaningful regulation".
It was created in response to the Great Depression, then repealed by the Gramm-Leach-Bliley act because money. Then the Dodd-Frank act tried to have it reinstated but failed, also because money.
You may already be familiar with all of this but mentioning in case you’re not.
(https://en.m.wikipedia.org/wiki/Glass–Steagall_legislation)
There’s a quite brilliant documentary that came out in 2010, Inside Job, that covers this, but which was completely overshadowed by the much less informative The Big Short which came out 5 years later.
Glass–Steagall in post-financial crisis reform debate: https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_in_post...
(Edit: Monetary policy / Monetarism > Current State , Liquidity trap > Global financial crises of 2008 and 2020: https://en.wikipedia.org/wiki/Liquidity_trap )
How do microlending and DeFi rates democratize subsidized capital availability?
From IL-RFC-1 Interledger Architecture https://interledger.org/rfcs/0001-interledger-architecture/ :
> Settlement for one account MUST NOT depend on the status of any other accounts.
> If settlement of one account in the Interledger is contingent on the status of another account or relationship, this could create the threat of cascading risks and failures, similar to problems that occurred during the 2008 global financial crisis. Nodes can protect themselves from such risks by choosing to use settlement technologies such as collateralized payment channels where available. These types of arrangements can provide high-speed settlement without a risk that the other side may not pay. For more information on different ledger types and settlement strategies, see IL-RFC-22: Hashed Timelock Agreements.
> Nodes can also choose never to settle their obligations. This configuration may be useful when several nodes representing different pieces of software or devices are all owned by the same person or business, and all their traffic with the outside world goes through a single “home router” connector. This is the model of `moneyd`, one of the current implementations of Interledger.
Reconsider what your stating here. If I have 10$, and I can therefore lend out 100$, but I only have requests to borrow 50$, then I have "too much cash". If I however had requests to borrow 200$, the I would need to find another 10$, for instance by promising someone a higher interest rate on their accounts. The fact that banks do fractional reserve does in no way guarantee that they do not end up having more cash on hand than they need to cover the demand for loans.
Banks that have too much cash on hand go out of business. If a bank ends up being near this it just reduces its loan rates and loans the money out for slightly less, but still better than sitting on cash.
Right.. The bank can increase its level of leverage principally by:
* Decreasing loan interest rates to encourage people to take loans
* and/or decreasing savings interest rates to discourage people from keeping deposits.
Of course, real banks do both based on market conditions and capital requirements. And, of course, there's not an implausibly thin level of reserves like you imply to pedantically harass the prior commenter: you must have at least the required reserves, and certainly having way too much cash is toxic to profitability.
So I don’t know how you’re claiming that banks aren’t sitting on too much cash?
People want to collect interest on their bank deposits purely out of greed, too.
I think "greed" is an unhelpful term as it is too emotionally charged for what is really just rational behaviour given economic incentives. So I would avoid calling banks greedy for trying to maximize profit by offering low interest rates just as I would avoid calling consumers greedy for choosing the bank that gives them the highest interest rate.
Depending on your definition of 'competition' and 'functioning'. There are markets that aren't competitive but are functioning, and markets that are competitive but aren't functioning.
I'm truly interested in what's happening now and why this _is not_ the case. Can you elaborate on what they're doing now to make now, rather than making on the spread?
Banks are discount houses. They create their own money against financial assets they buy from you with that money.
They are factories, not warehouses.
Deposit interest rates aren’t going up because there’s nowhere else the money can go. Nobody wants be the retail to wholesale middleman at present.
Banks don't take deposits and they don't lend money. Banks create money.
When they "lend," what they are legally doing is purchasing a newly issued security for your home. And they are doing so with created money, that money is not transferred from some other account.
Similarly when you "deposit," the money is legally now the bank's. The bank now has a liability to you, but it is not a custodial intermediary "holding" your money for you.
It is poorly understood that banks are in fact creating credit. Most people believe in either the fractional reserve model of banking or in the financial intermediary model.
This is a real problem, because as they create credit to finance existing asset purchases (as opposed to financing new investment) they create asset price inflation & bubbles and foster inequality.
Read anything by the brilliant Richard Werner who writes about this extensively, this interview has a short summary of how banks actually work in law: https://youtu.be/EC0G7pY4wRE https://professorwerner.org/shifting-from-central-planning-t...
the seller of that purchase transaction will have received the financing credit as cash.
This cash is, in most cases, invested. If the seller had a loan, they might've repaid the loan - but then this repayment would in part, cancel out the credit creation the buyer's bank did. The net outcome, if it was positive, is the profit that the seller obtained, and this is real wealth created.
This wealth is often reinvested somewhere - either to purchase existing assets (in which case, this cycle repeats), or to finance a new asset/investment (like a startup).
However, the purchasing of existing assets is required for this system to work - like an exit strategy for the initial investors of that asset.
Banks doing lending _could_ cause a bubble, if the rate of interest is too low compared to the growth in the economy (the assumption is that there's a limit to how fast you can grow new assets). Whether the past decade since the GFC had too low an interest rate, is up for debate.
This is eerily similar to the common crypto exchanges that take your fiat and sell you their exchange tokens they are minting out of thin air. The market decides the value of these made up exchange tokens e.g. Binance Bnb tokens
I’m sure there are many other interesting crypto parallels to what banks do with money behind closed doors. Anyone else got some good examples to share?