Banking and money

[johnhemming2]

It isn't out of context. From the bank's perspective a deposit account is a credit account which from the perspective of double entry book keeping is indeed a liability.

The document is here:
http://www.bankofengland.co.uk/publicat ... eation.pdf

[johnhemming2]

If the bank can simply create money to lend to someone, and charge interest on that amount, then why do they need to borrow money from depositors and pay them interest for it ?

A good question. That is because there are different types of money. They can create deposits and loan accounts without money from anyone else, but they need liquidity/money for the deposit to be payable to a person with an account at another bank.

[UndercoverElephant]

If the bank can simply create money to lend to someone, and charge interest on that amount, then why do they need to borrow money from depositors and pay them interest for it ?

They don't. Well...there is no legal requirement for them to do so, anyway. They use that money from savers to invest, or play the markets to make more money. They also want money from savers to keep their loan-to-deposit ratio healthy, although this is not a legal requirement, just good practice.

[UndercoverElephant]

If the bank can simply create money to lend to someone, and charge interest on that amount, then why do they need to borrow money from depositors and pay them interest for it ?

A good question. That is because there are different types of money. They can create deposits and loan accounts without money from anyone else, but they need liquidity/money for the deposit to be payable to a person with an account at another bank.

No they do not!! When you take out a mortgage, the bank creates an account and credits it with the amount of money required for the mortgage. That is new money created at that moment, out of nowhere, and it is then transferred to the other bank when the property transaction completes. No funds from central bank or savers are required for this to happen. The money is created by the bank that is doing the lending.

[johnhemming2]

What you are saying about b) is wrong. M0/M1 liquidity is not created by creating a linked deposit and loan account.

That is not what it says in the Bank of England document.

The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood.

One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits
are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.

In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.

Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.

As for the loan to deposit ratio - that is also voluntary in the UK. There is no legal requirement.

Let us look further down the same page in the Bank of England's document

Commercial banks create money, in the form of bank deposits,
by making new loans. When a bank makes a loan, for example
to someone taking out a mortgage to buy a house, it does not
typically do so by giving them thousands of pounds worth of
banknotes. Instead, it credits their bank account with a bank
deposit of the size of the mortgage. At that moment, new
money is created. For this reason, some economists have
referred to bank deposits as ‘fountain pen money’, created at
the stroke of bankers’ pens when they approve loans.(1)

This process is illustrated in Figure 1, which shows how new
lending affects the balance sheets of different sectors of the
economy (similar balance sheet diagrams are introduced in
‘Money in the modern economy: an introduction’). As shown
in the third row of Figure 1, the new deposits increase the
assets of the consumer (here taken to represent households
and companies) — the extra red bars — and the new loan
increases their liabilities — the extra white bars. New broad
money has been created. Similarly, both sides of the
commercial banking sector’s balance sheet increase as new
money and loans are created. It is important to note that
although the simplified diagram of Figure 1 shows the amount
of new money created as being identical to the amount of new
lending, in practice there will be several factors that may
subsequently cause the amount of deposits to be different
from the amount of lending. These are discussed in detail in
the next section.

While new broad money has been created on the consumer’s
balance sheet, the first row of Figure 1 shows that this is
without — in the first instance, at least — any change in the
amount of central bank money or ‘base money’. As discussed
earlier, the higher stock of deposits may mean that banks
want, or are required, to hold more central bank money in
order to meet withdrawals by the public or make payments to
other banks. And reserves are, in normal times, supplied ‘on
demand’ by the Bank of England to commercial banks in
exchange for other assets on their balance sheets. In no way
does the aggregate quantity of reserves directly constrain the
amount of bank lending or deposit creation.

The banks need liquidity/narrow money/base money in order to be able to pay other banks (or meet withdrawals).

[johnhemming2]

If the bank can simply create money to lend to someone, and charge interest on that amount, then why do they need to borrow money from depositors and pay them interest for it ?

A good question. That is because there are different types of money. They can create deposits and loan accounts without money from anyone else, but they need liquidity/money for the deposit to be payable to a person with an account at another bank.

No they do not!! When you take out a mortgage, the bank creates an account and credits it with the amount of money required for the mortgage. That is new money is created at that moment, out of nowhere, and it is then transferred to the other bank when the property transaction completes.

Yes, but on completion the mortagee bank needs liquidity in order to pay the other bank.

[UndercoverElephant]

What you are saying about b) is wrong. M0/M1 liquidity is not created by creating a linked deposit and loan account.

That is not what it says in the Bank of England document.

The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood.

One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits
are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.

In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.

Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.

As for the loan to deposit ratio - that is also voluntary in the UK. There is no legal requirement.

Let us look further down the same page in the Bank of England's document

Commercial banks create money, in the form of bank deposits,
by making new loans. When a bank makes a loan, for example
to someone taking out a mortgage to buy a house, it does not
typically do so by giving them thousands of pounds worth of
banknotes. Instead, it credits their bank account with a bank
deposit of the size of the mortgage. At that moment, new
money is created. For this reason, some economists have
referred to bank deposits as ‘fountain pen money’, created at
the stroke of bankers’ pens when they approve loans.(1)

This process is illustrated in Figure 1, which shows how new
lending affects the balance sheets of different sectors of the
economy (similar balance sheet diagrams are introduced in
‘Money in the modern economy: an introduction’). As shown
in the third row of Figure 1, the new deposits increase the
assets of the consumer (here taken to represent households
and companies) — the extra red bars — and the new loan
increases their liabilities — the extra white bars. New broad
money has been created. Similarly, both sides of the
commercial banking sector’s balance sheet increase as new
money and loans are created. It is important to note that
although the simplified diagram of Figure 1 shows the amount
of new money created as being identical to the amount of new
lending, in practice there will be several factors that may
subsequently cause the amount of deposits to be different
from the amount of lending. These are discussed in detail in
the next section.

While new broad money has been created on the consumer’s
balance sheet, the first row of Figure 1 shows that this is
without — in the first instance, at least — any change in the
amount of central bank money or ‘base money’. As discussed
earlier, the higher stock of deposits may mean that banks
want, or are required, to hold more central bank money in
order to meet withdrawals by the public or make payments to
other banks. And reserves are, in normal times, supplied ‘on
demand’ by the Bank of England to commercial banks in
exchange for other assets on their balance sheets. In no way
does the aggregate quantity of reserves directly constrain the
amount of bank lending or deposit creation.

The banks need liquidity/narrow money/base money in order to be able to pay other banks (or meet withdrawals).

Withdrawals by the public are a different matter, because these require notes and coins which can only be supplied by the central bank. Private retail banks obviously don't create this sort of money, but it is only about 3% of the money in circulation. Most of the other 97% is created by retail banks when loans and mortgages are taken out. In other words, if every person, company and country paid off all its debts, almost all of the money currently in circulation would cease to exist.

Banks may also need money to pay other banks, but NOT in the case of somebody taking out a mortgage or loan and that money then ending up in another bank. They only need money to pay other banks when it is the bank itself that owes another bank money.

[johnhemming2]

[Banks may also need money to pay other banks, but NOT in the case of somebody taking out a mortgage or loan and that money then ending up in another bank. They only need money to pay other banks when it is the bank itself that owes another bank money.

This is where your misunderstanding is

The point is that the banks pay each other on behalf of their customers. Hence the clearing system for cheques and BACS and things like that.

Going back to Greece and the ELA question. Greek Banks were prevented from making further payments either in cash or to non-greek banks electronically through target 2 because they had maxed out on their "Emergency Liquidity Assistance". Because the banks could not pay other non-greek banks their customers were stuck and you had stories like this:

http://news.nationalpost.com/news/world ... rds-bounce

In this case their cards bounced not because the bank had stopped the couple from adding to their liability, but because the greek bank on which they were issued was stuck as for liquidity because of the cap on ELA.

[UndercoverElephant]

A good question. That is because there are different types of money. They can create deposits and loan accounts without money from anyone else, but they need liquidity/money for the deposit to be payable to a person with an account at another bank.

No they do not!! When you take out a mortgage, the bank creates an account and credits it with the amount of money required for the mortgage. That is new money is created at that moment, out of nowhere, and it is then transferred to the other bank when the property transaction completes.

Yes, but on completion the mortagee bank needs liquidity in order to pay the other bank.

No it does not, John. The "mortgagee bank" creates that "liquidity" (why are you using this word?)...the mortgagee bank creates the money when the mortgage is taken out and it is this very same money that is paid to the other bank when the transaction completes.

I've been through this process with countless people. What I am telling them is so outrageous that they simply cannot believe it is true, but true it is. Private banks have the power to create money out of nowhere and lend it to people who then have to pay it back with interest. The banks do not require central bank money to do this.

If you still don't believe me, have a look at the brief introductory videos on this page:

http://positivemoney.org/videos/introduction/

Or just watch this one:

http://positivemoney.org/videos/introdu ... ney-comes/

[johnhemming2]

There is no sense me looking at those videos.

Often settlement systems for cash operate on a net basis where a lot of payments too and from an institution are netted off into one large payment one way or another.

However, let us consider a sequence of transaction.

I, buy a house off you for 150K. You own it outright. I bank with RBS, you bank with Lloyds.

I agree a mortgage with RBS for 150K. They debit a loan account and credit a deposit account. For what its worth this creates a broad money deposit account. (M3, M4 that sort of thing).

It is then completion day and I need to pay you for the house. I instruct my bank to do a CHAPS payment to you.

https://en.wikipedia.org/wiki/CHAPS

CHAPS is a real time gross settlement system where each transaction that goes into CHAPS is replicated in the reserve accounts with the central bank.

https://en.wikipedia.org/wiki/Real-time ... settlement

RBS then through CHAPS reduces its balance with the Bank of England by 150K and increases the balance of Lloyds with the BoE.

Lloyds has now got 150K more of Narrow Money/Base Money/Central Reserves and RBS has 150K less.

Lloyds make an entry into your account crediting your deposit account by 150K.

From a double entry accounting perspective

Transaction 1
Debit loan account, credit deposit account (at RBS)

Transaction 2
Debit deposit account me, credit reserves (at RBS).
Debit RBS, credit Lloyds (at the central bank).
Debit reserves, credit deposit account you at (Lloyds).

You then have a deposit account which if Lloyds don't go bust or have a liquidity crisis you can make payments from.

Remember from the perspective of double entry book keeping that an asset for an entity is a debit and a liability is a credit.

(things are obviously slightly more complex than the above because the money often moves through solicitors clients' accounts rather than directly).

[johnhemming2]

Here is the Bank of England's document about RTGS
http://www.bankofengland.co.uk/markets/ ... sguide.pdf

[Tarrel]

John, as far as you're aware, what IS money?...in your opinion.

I've given up trying to answer that one. Now just pursuing a life-strategy around trying to need as little of it as possible (whatever "it" is!)

Based on the irony that you've now afforded yourself the head-space to feel so indifferent to it, temporarily.

Breath brother....and think a while, people and planet are suffering for this shit.

Did you test the nitrogen levels from the gorse decomposition btw?

Not feeling indifferent to money; more threatened by it. The more often I hear the words "billions" and "trillions" in the news, and the more I read about debt levels, the less stable I feel our monetary system is and the less I want to be part of it. Granted, money has enabled me to purchase some hard assets which are now giving me the freedom to be less money-dependent, but it's no free lunch. Personal time and labour now go into producing stuff to use rather than earning money to buy stuff to use.

How'd you know about our gorse? Did I mention it previously?

[johnhemming2]

Meanwhile I've had an opportunity to read Yanis Varoufakis The Global Minotaur.

What does he say about fossil fuel depletion and the further development of automation (two issues that create really big challenges for the global economy).

[UndercoverElephant]

There is no sense me looking at those videos.

Why not? Do you think PositiveMoney are a bunch of crazies? They are not. This has been debated in the the House of Commons, and almost no MPs turned up because the overwhelming majority of them do not understand how banks create money, just like you don't. If they understood, they'd have attended the debate. If you actually believed what I am telling, wouldn't you have attended it?

However, let us consider a sequence of transaction.

I, buy a house off you for 150K. You own it outright. I bank with RBS, you bank with Lloyds.

I agree a mortgage with RBS for 150K. They debit a loan account and credit a deposit account. For what its worth this creates a broad money deposit account. (M3, M4 that sort of thing).

RBS create an account with £150K in it. They also create the £150K.

It is then completion day and I need to pay you for the house. I instruct my bank to do a CHAPS payment to you.

CHAPS is a real time gross settlement system where each transaction that goes into CHAPS is replicated in the reserve accounts with the central bank.

Yes.

RBS then through CHAPS reduces its balance with the Bank of England by 150K and increases the balance of Lloyds with the BoE.

Lloyds has now got 150K more of Narrow Money/Base Money/Central Reserves and RBS has 150K less.

Lloyds make an entry into your account crediting your deposit account by 150K.

From a double entry accounting perspective

Transaction 1
Debit loan account, credit deposit account (at RBS)

Transaction 2
Debit deposit account me, credit reserves (at RBS).
Debit RBS, credit Lloyds (at the central bank).
Debit reserves, credit deposit account you at (Lloyds).

You then have a deposit account which if Lloyds don't go bust or have a liquidity crisis you can make payments from.

Remember from the perspective of double entry book keeping that an asset for an entity is a debit and a liability is a credit.

(things are obviously slightly more complex than the above because the money often moves through solicitors clients' accounts rather than directly).

How to make something simple sound incredibly complicated.

You have just described how CHAPS works. What I was asking you was this: where do you think the £150K comes from in the first place?

I'm trying to get you to acknowledge the simple fact that when you take out a £150K mortgage with RBS, then RBS creates £150K rather than the Bank of England creating it or RBS using other people's savings to fund the mortgage (how that £150K gets from RBS to another bank is not important). You are responding with reams of irrelevant and inpenetrable gobbledegook.

[johnhemming2]

You have just described how CHAPS works. What I was asking you was this: where do you think the £150K comes from in the first place?

I'm trying to get you to acknowledge the simple fact that when you take out a £150K mortgage with RBS, then RBS creates £150K rather than the Bank of England creating it or RBS using other people's savings to fund the mortgage (how that £150K gets from RBS to another bank is not important). You are responding with reams of irrelevant and inpenetrable gobbledegook.

I have described how it actually works. The key control on liquidity or "narrow money" (which is equivalent to notes and coins) is the book entry in the central bank's books (the second line) between RBS and Lloyds.

To be allowed to make the 150K transfer there has to be liquidity from somewhere. Some of it comes from deposits.

Debit RBS, credit Lloyds (at the central bank).

The liquidity for this can also come from the central bank itself through secured lending or through original equity in the bank, and various other sources of narrow money.

It is slightly complicated because there are many ways of defining and counting "money". People who don;t understand how the the system actually works tend to think that all types of money are the same as notes and coins.

Bank book entries (aka Deposits) in Greek banks are worth diddly squat if you are in new york and the greek banks are not allowed to pay out of greece because of hitting the liquidity limit.

This actually happened and was reported recently, Hence you cannot deny that there are liquidity limits that operate at the bank level. It is not just a theory.

Lots of people don't understand it. Positive Money may fall into that category. I don't mind arguing about it and providing quotations from documents with links to those documents, but I am not going to pray in aid random videos, nor will I watch them. If they have valid points then make them to me.

I will otherwise spend my time playing jazz music.
https://www.youtube.com/watch?v=8tk9SdF4OcE