undefined | Better HN

0 pointsdkasper2y ago0 comments

Not quite because it’s almost backward with banks. Yes they take your deposits, but to the bank a deposit is a liability not an asset. Banks can lend out much more than their deposits (fractional reserve) but they technically don’t even need deposits at all to create a loan, because a loan is credit (asset) and a liability to the borrower. This means banks in the modern sense can literally create money, so they don’t need your deposits. You can imagine if no one defaults banks can balance their cash flows without any deposits at all, but in practice there is risk so deposits are more like a form of reserves more or less, and potentially an expensive one if interest rates are high. https://www.investopedia.com/articles/investing/022416/why-b...

0 comments

reese_john2y ago

> but to the bank a deposit is a liability not an asset

Deposits are an asset AND a liability

> This means banks in the modern sense can literally create money, so they don’t need your deposits

Not really. Banks still have to spend central banking money when doing interbank settlements, and deposits are an important source of funding to day-to-day operations.

Say you have an account within Chase and want to send money to your friend at JPMorgan, Chase can't simply "create dollars" - they need to have enough reserves in their Central Bank account.

rileymat22y ago

The part that is missing is that when you take that money to buy the thing intended with the loan the bank has to give you that money unless it is going to a customer of the same bank; impacting the fractional reserve requirement.

As a thought experiment, if you started a bank from 0, how do you pay out the first loan?

Yes, they create money, but deposits are a requirement to do it. (Unless you are doing some interest rate arbitrage by getting a loan from another source)

reese_john2y ago

> Yes, they create money, but deposits are a requirement to do it.

Deposits, although an important source of funding are not a requirement, capital is. There are capital requirements that make starting and running a bank a fairly expensive enterprise - you need to put up a lot of your own money (equity) for use.

benlivengood2y ago

I think a primary benefit of a bank is the ability to borrow directly from the Federal Reserve or similar central government bank. The spread on interest rates between the central bank and consumer rates is revenue.

mempko2y ago

To add to what you said, fractional reserve banking is really not a think. Many countries don't have any fractional requirements and in some it only applies to certain kinds of loans.

j / k navigate · click thread line to collapse

0 comments

reese_john2y ago

> but to the bank a deposit is a liability not an asset

Deposits are an asset AND a liability

> This means banks in the modern sense can literally create money, so they don’t need your deposits

Not really. Banks still have to spend central banking money when doing interbank settlements, and deposits are an important source of funding to day-to-day operations.

Say you have an account within Chase and want to send money to your friend at JPMorgan, Chase can't simply "create dollars" - they need to have enough reserves in their Central Bank account.

rileymat22y ago

As a thought experiment, if you started a bank from 0, how do you pay out the first loan?

Yes, they create money, but deposits are a requirement to do it. (Unless you are doing some interest rate arbitrage by getting a loan from another source)

reese_john2y ago

> Yes, they create money, but deposits are a requirement to do it.

benlivengood2y ago

mempko2y ago

To add to what you said, fractional reserve banking is really not a think. Many countries don't have any fractional requirements and in some it only applies to certain kinds of loans.

j / k navigate · click thread line to collapse