undefined | Better HN

0 pointsstephen_g11mo ago0 comments

Retail banks actually don’t ‘pool people’s money and invest it’, and for good reason. Investment banks are different from regular retail banks for a reason (which is that that creates way too much risk to deposits for everyday banking).

The main business of banking is actually leveraging the capital of their owners (shareholders) to lend. Deposits are not the main game, and are there for two reasons - firstly that lending produces deposits, so banks may as well be able to hold deposits just for that reason, but also because deposit inflows create the liquidity banks need to lever up their capital. This is the real reason why banks pay interest on deposits - to encourage people to transfer money in and not transfer as much out. Actually just having the deposits sitting there doesn’t do much for the bank, so the bank more wants you to transfer money in to increase your balance and not just hold it.

0 comments

throwaway203711mo ago

We might be talking past each other, but this part:

    > Retail banks actually don’t ‘pool people’s money and invest it’

In all highly developed nations (G7 or OECD), most commercial banks invest a portion of deposits into government bonds and highly rated corporate bonds. They may also deposit funds with the central bank, usually called "The Window", but the interest rate will be (usually) lower than gov't bonds or corporate bonds. The difference between the interest paid on these deposits and earnings from these investments is called the NIM -- net interest margin. (This margin also includes lending these deposits at a much higher rate of interest than they pay depositors.)

However, the phrase "invest it" makes it sounds like they are gambling the money on speculative investments! There are very strict rules about what securities (classes and ratings) are allowed as investments.

Projectiboga11mo ago

The Glass-Steagall Act, enacted in 1933, was partially repealed in 1999 by the Gramm-Leach-Bliley Act (GLBA). Specifically, the GLBA repealed sections 20 and 32 of the Glass-Steagall Act, which had prohibited affiliations and interlocks between commercial and investment banks. This allowed financial institutions to engage in both commercial and investment banking activities, which was seen as a step towards universal banking.

gruez11mo ago

>Retail banks actually don’t ‘pool people’s money and invest it’,

>deposit inflows create the liquidity banks need to lever up their capital

Aren't these basically the same thing? There's complicated capital structure around how much tier 1 capital banks have to hold, and what deposits have to be backed by, but at the end of the day banks are taking money from depositors and investors, and using it to buy assets. More importantly if you deposit a dollar, that's not sitting around in a vault somewhere, it's used to buy treasuries or whatever. Most people would characterize that as "pool people’s money and invest it".

roenxi11mo ago

It seems like a reasonable objection, AFAIK the argument would boil down equivalently to money being a unit of measurement therefore the language is wrong - it is a bit like saying "pool people's meters" - meters are a unit of measurement as opposed to a thing. Can't pool meters, can pool meters of cloth. Especially since we don't hold the amount of wealth measured by a unit of currency steady it doesn't make sense to talk about "pooling money".

In this case though I said banking system, not retail banking system and I think the fairest reading given the ambiguity is just to treat it as "pool people's wealth" and shift to talking about the real economy.

Retric11mo ago

Fiat money is a token of exchange backed up by the need for everyone in an economy to pay taxes using those tokens.

The idea it’s a measurement is appealing but incomplete, you can’t exchange abstract gallons or other measurements in the abstract only in terms of a measurement of something.

roenxi11mo ago

> you can’t exchange abstract gallons or other measurements in the abstract only in terms of a measurement of something.

I have an implement for doing exactly that on my desk - a cup. The people who made the cup don't know what I'm going to be filling it with but they have a very good idea of what volume it'll take up. I could go to the pub with friends and ask for a glass of something but I don't mind what. The point of a unit of measurement is it enables abstract handling of quantities. Otherwise we may as well have a unique system of measurement per thing.

And if you want a monetary example, there is barter. I can exchange $50 of work directly for $50 of food, abstracting out the money. That wouldn't be possible if the token itself were the important thing, because it isn't present anywhere in the example.

> Fiat money is a token of exchange backed up by the need for everyone in an economy to pay taxes using those tokens.

Obviously there is more than one type of money if you feel a need to add a prefix to explain what type of money you are discussing. The other types aren't backed up by a need for everyone to pay taxes, money can exist independently of a taxation system. Then it is called non-fiat money. You're focusing on the non-monetary aspects of the system, which is cool and all but missing the forest for the trees.

1 more reply

j / k navigate · click thread line to collapse

0 comments

throwaway203711mo ago

We might be talking past each other, but this part:

    > Retail banks actually don’t ‘pool people’s money and invest it’

Projectiboga11mo ago

gruez11mo ago

>Retail banks actually don’t ‘pool people’s money and invest it’,

>deposit inflows create the liquidity banks need to lever up their capital

roenxi11mo ago

Retric11mo ago

Fiat money is a token of exchange backed up by the need for everyone in an economy to pay taxes using those tokens.

The idea it’s a measurement is appealing but incomplete, you can’t exchange abstract gallons or other measurements in the abstract only in terms of a measurement of something.

roenxi11mo ago

> you can’t exchange abstract gallons or other measurements in the abstract only in terms of a measurement of something.

> Fiat money is a token of exchange backed up by the need for everyone in an economy to pay taxes using those tokens.

1 more reply

j / k navigate · click thread line to collapse