That’s not how it works. This is a good primer by the Bank of England: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Bank lending always creates new money. They don’t (and can’t) “lend deposits”.
Bank lending always creates new money. They don’t (and can’t) “lend deposits”.
This, plus the other effects (like what the BoE calls “prudential regulation”) are the reason why you don’t see banks with zero deposits and a trillion pounds of loans.
Credit vs quantity theory of money is basically a concern of monetary policy (like: what is the expected effect of quantitative easing?) and doesn’t really bear on decisions at the level of individual banks or borrowers: things look consistent with both theories.
Like: it doesn’t matter whether classical or relativistic mechanics are “true” if you’re only following the flight of a baseball.
The BOE is simply pointing out in the link that they are the only proper bank in the UK. All the others borrow from the BOE to make loans. Commercial banks don't "create" money any more than the BOE "borrows" it from elsewhere.... The BOE creates money and lends it to commercial banks who put up a deposit and make a reasonable case for credit.
Also why link an article from the UK when the subject is a US bank? There are differences between the two countries banking systems and monetary policies.
- the bank records an asset (the loan) and a liability (the deposit in the borrower's account) - the borrower records an asset (the loan money now deposited at the bank) and a liability (the loan)
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
At this point the money literally came out of thin air, there's more total currency in the system then there was before.
It might seem like an irrelevant nuance but it's pretty important to understanding how the money supply works
So even though the amount of currency looks like it has increased, it hasn’t really… unless I’m misunderstanding still. But my impression is this is pretty much what happened yesterday with SVB.
It's very hard for people to accept this because of how most people basically trade 1/3 of their lives to get some. It just doesn't "feel right"
Currency is just a physical representation of that unit.
Perhaps because of the insurance from central banks this problem is avoided.
If the bank is giving cash to the withdrawer, that would come out of their capital reserve I guess. If they didn't have that, they FDIC insurance would kick in.
You can say the loan is a number in a database, but once it’s withdrawn from the bank the bank can’t just go into the database and undo the loan.
Your example doesn't make much since because any bank has many good loans and a capital reserve to deal with the few bad loans.
Economists actually refer to the USD in your account as bank money because it did not come from the government. You could just as easily think of that money in your account as a bank issued stablecoin pegged to the dollar that's convertible to dollars.
Maybe that’s already implied in your description but they don’t need to borrow from anyone if they had enough reserves to start with.
Yes. Money isn't 'real' in the sense people typically mean. It's an accounting unit, so it's exactly as real as a liter or a kilometer.
Also, if it was all withdrawn it's a bank run, which has not been a problem in the US for quite a while.
Overall it cancels out for the large banks, of course people transfer money they just borrowed from the bank away, but that bank also has customers that are recipients of money. That, and other mechanisms between banks and banks and central bank(s) to balance such things within all the banks in the overall economy. Money withdrawn from one bank goes to another one, and everybody is not just sender but also recipient from someone else.
> Bank lending always creates new money. They don’t (and can’t) “lend deposits”.
It's just not true. The banks do transfer literal cash from deposits out of the system through loans. The cash in banks didn't come from thin air.
Why do you keep insisting on the "cash"? The by far least important kind of money? First of all everything is just virtual, electronic. Only a tiny fraction - and only temporary! It's not stocked at home, but used to buy something and that means deposited again in another bank - is "cash".
And yes, the bank deposits are "out of thin air" -- https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Yes banks need some reserves, but this is waayyyy more complicated than them using the deposits. Which, for the most part, are not cash. That's only that tiny fraction of paper money use din circulation, which also is a lot less than it used to be with all the card-money.
https://www.bankofengland.co.uk/explainers/what-is-money
In the UK, as an example:
> 96% is electronic
> 4% is cash
USD is different because that currency is used for far more than just regular circulation, and world-wide. But even then estimates are ca. 8% cash maximum, for the world, which includes a lot less sophisticated economies. A bit more for the USD for obvious reasons, but most of that is not circulating in the US economy.
In any case, even in the US, with all its cards and card payments, money is mostly electronic and not cash and is transferred from bank to bank and hardly leaves the banking system.
ABOUT THAT TERM "OUT OF THIN AIR"
I've seen articles arguing money is not create out of thin air, e.g. https://cepr.org/voxeu/columns/banks-do-not-create-money-out...
> commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise
Uhm.. yes, exactly. They can't do it at will, they need a borrower to sign. I mean, now we start arguing definitions, always a bad sign, especially when both sides actually are in perfect agreement and it's about the words used. This article to me is just weird, arguing it's not out of thin air, while everything being described says just that, only that their understanding of "out of thin air" is subjectively different than that of many other people. But there is no difference in knowledge and opinion about the underlying mechanism, only disagreement about some fuzzy term that some like to use and some apparently hate for whatever reason.
For arguments about definitions I would like to point to "Disputing Definitions" (6 min read) https://www.lesswrong.com/posts/7X2j8HAkWdmMoS8PE/disputing-...
According to your theory, what is the total amount of deposits at this bank after making the loan?
If, as you say, banks were lending deposits, then the total amount of deposits cannot possibly have changed and that new loan of £100 would have to come out of some other customer's bank account.
I would be pissed if my bank account balance suddenly dropped and the bank told me, sorry we have lent your money to someone else.
So this is clearly not what's happening.
If someone comes to take out a loan for $1000 and withdraw the money what would happen? They'd go get the money everyone left there and give it to the new customer. Now they bank has no money because they just lent all the deposits. $1100 in deposits and $1100 in loans
Incorrect, banks create deposits when they issue loans and only require reserve balances sufficient to satisfy net flows of funds between institutions.
They can also borrow those reserves.
So deposits are required to increase profitability, and of course a minimum level of profitability is required to be solvent, but banks in now way “lend out deposits”.
TWB (unrelated to SVB) realizes that it’s in trouble - customers are taking a lot of their deposits out, and confidence in the institution is low.
So, instead of trying to liquidate some of their assets or raise capital (which is what would be conventional) they decide to lend their bank president a trillion dollars of interest free loan with a recall feature, on the contingency that he deposit it in a non-interest bearing account with a 300 year notice requirement.
In your understanding of the mechanics of banking; this is fine. The bank magics $1tn of deposits out of thin air, records an equivalent asset, and can then just pay all of their customers from these new deposits they have.
Or not? And if not, why not?
Which means banking system as a whole creates 'private money' when flows of 'central bank money' between banks are balanced, but each individual bank cannot do it faster than others, otherwise these flows will be negative and it will be losing 'central bank money' and/or hard assets (which would be sold to acquire 'central bank money').
In your worldview, can you explain how it is possible for a bank to have far more loans on their books than they have deposits (see: fractional reserve banking)?
The answer in the US is simple: the Fed.
A bank can make an infinite amount of loans. They are not constrained by anything.
The only "limitation" they have is the future default rate of the people who accept loans from them.
The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan.
Now, many banks take customer deposits. I think there are 2 reasons they do that:
1. Deposits may be less expensive than borrowing from the Fed.
2. Account holders are warm leads for future loans.
But in principle, a bank doesn't have to take any deposits.
Ehhh, how does that work exactly? They go up to the discount window and borrow from the Fed every time they issue a loan?
I don't know. I don't work at a bank.
But loans aren't typically available immediately - they take time to clear. It doesn't seem unreasonable to me that they'd bundle the day's loans (or maybe a few hours at a very large bank) to limit the number of transactions they'd have to make.
tl;dr yes, banks create money out of thin air. It's been this way for decades.
They are constrained by capital and/or reserve requirements
> The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan.
Nope. Banks can borrow against their government securities from Central Banks by "rediscounting" them during discount windows, should they need extra liquidity. Note that this is not the preferred method since Central Banks usually charges a premium. These are secured loans.
See https://www.federalreserve.gov/monetarypolicy/discountrate.h...
That's incorrect, there are very strict limits on the solvency ratio placed on the banks that you usually deal with.
https://www.investopedia.com/ask/answers/052515/how-are-risk...
If none of the loan money was redeposited than the bank couldn’t create new money.
I've worked for a bank, both on the 'banking' side and on the IT side. One of the first things that gets drilled into your head is that banks create money. With every loan on the books more money gets put into circulation. There are some restrictions on how much you can put into circulation and there are some restrictions on how much cash you have to have on hand compared to the number of deposits that you have lying around.
But a bank could easily (as long as the bank is 'solvent' according to the rules set by the local central bank) write loans well in excess of it's deposits, technically it need not have any deposits at all.
Fractional reserve banking is about having more deposits (on the liability side) than reserves (on the assets side).
I won't say that it's not possible for a bank to have far more loans on their books than they have deposits (they could finance themselves differently) but I'm not sure if that actually happens. Can you give an example of a bank having far more loans on their books than they have deposits?