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Time to tax wealth - Covid cost Solution
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Nope, they don't even lend a multiple out
Banks are not actually constrained by reserve requirements (which is what would be required, for a multiple to be loaned out - a reserve requirement of 20%, if it was a constraint, would allow a loan multiple of 5x) - banks are constrained by collateral requirements.
What that means, is that as long as bank loans have enough collateral in the form of e.g. houses, business assets etc. (which, simplified, is a given, before the loan is given out, in most cases), which can be liquidated if the loan is defaulted on - then there is no further limitation on a banks ability to create money.
The reason banks are not constrained by reserve requirements, is because banks loan out money first, and then shore up reserves afterwards. To shore up reserves, banks seek money on the interbank market - and if no other private banks have spare reserves/money, to lend on the interbank market, a bank will go to the central bank for a loan.
In theory, a central bank could refuse to provide a loan - and this would enforce reserve requirements - but in practice, a central bank will never do this, because it is a practical impossibility - when the bank fails to shore up reserves, it would have to immediately recall the loan it gave out, which would be a breach of contract, and would cause chaos, as the business will have already spent the money, would need to recall expenditures, and the next business on would have spent the money, recalling expenditures etc. etc..
This sounds like just a technicality, but in practice it means that reserve requirements do not place a limitation on lending - and that the entire concept of fractional reserve banking can be chucked in the bin.
TLDR Loans create money, and the only limit is collateral requirements - reserve requirements, in practice, do not exist.0 -
The loans create money. It doesnt come from deposits as once taught. The remedial at this stage.
The fact that people don't know this is interesting, of course it has policy implications. If you believe that all savings are loaned out then you would have a different opinion on passive wealth, or a wealth tax, than if you know the truth. If its loaned out then the wealth tax is useless, if it isnt the wealth tax will create economic activity.
No loans do not create money. While all loans do not come from deposits most do. The rest mainly come from bonds. Where do these bonds come from. From pension funds and from company reserves. Not all large companies have debts some have large cash reserves. Ryanair is an example. Apple is another It will mainly buy bonds with this money. Some will do bonds for other companies, this can be relatively high risk, but a lot of companies will just take bank bonds.
When the market becomes unsettle central banks will issue bonds to banks as they percieve these to be the experts in lending mattersNope, they don't even lend a multiple out Banks are not actually constrained by reserve requirements (which is what would be required, for a multiple to be loaned out - a reserve requirement of 20%, if it was a constraint, would allow a loan multiple of 5x) - banks are constrained by collateral requirements.
What that means, is that as long as bank loans have enough collateral in the form of e.g. houses, business assets etc. (which, simplified, is a given, before the loan is given out, in most cases), which can be liquidated if the loan is defaulted on - then there is no further limitation on a banks ability to create money.
The reason banks are not constrained by reserve requirements, is because banks loan out money first, and then shore up reserves afterwards. To shore up reserves, banks seek money on the interbank market - and if no other private banks have spare reserves/money, to lend on the interbank market, a bank will go to the central bank for a loan.
In theory, a central bank could refuse to provide a loan - and this would enforce reserve requirements - but in practice, a central bank will never do this, because it is a practical impossibility - when the bank fails to shore up reserves, it would have to immediately recall the loan it gave out, which would be a breach of contract, and would cause chaos, as the business will have already spent the money, would need to recall expenditures, and the next business on would have spent the money, recalling expenditures etc. etc..
This sounds like just a technicality, but in practice it means that reserve requirements do not place a limitation on lending - and that the entire concept of fractional reserve banking can be chucked in the bin.
TLDR Loans create money, and the only limit is collateral requirements - reserve requirements, in practice, do not exist.
The bold part is rubbish 2008-2012 would never have happened if it was a fact.Slava Ukrainii
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Yep, looks like they didWanderer78 wrote: »baring in mind, so to did the Bundesbank, writing a similar paper...https://www.bundesbank.de/en/tasks/topics/how-money-is-created-667392
In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers.
Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer's bank account in return.
This means that banks can create book money just by making an accounting entry: according to the Bundesbank's economists, "this refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers".
By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).
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Yep, looks like they did...https://www.bundesbank.de/en/tasks/topics/how-money-is-created-667392
In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers.
Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer's bank account in return.
This means that banks can create book money just by making an accounting entry: according to the Bundesbank's economists, "this refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers".
By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).
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both papers are cited regularly by some economic commentators in regards the origins of money creation, its disturbing that many, some who really should know this stuff, still dont accept it0 -
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