Under What Circs Do Interest Rates Rise?

[Mr Nice]

you cannot lend money at all without fractional reserve if you borrow it,

while I don't necessarily disagree, I think you would be better off saying that you can't lend without LEVERAGE if you have borrowed it.

fractional reserve banking is a specific thing that might not be occurring in a modern environment.

[aliveandkicking]

while I don't necessarily disagree, I think you would be better off saying that you can't lend without LEVERAGE if you have borrowed it.

fractional reserve banking is a specific thing that might not be occurring in a modern environment.

Leverage and fractional reserve are the same thing but you might not have a specified regulated reserve

Oddly steve said because i had no reserve it was not fractional reserve! Whereas if i had not had zero fractional reserve and retained one penny he would have said ok fine.

And you are saying that if a bank goes and gets one million reserves at libor for 5 years it is not allowed to lend those reserves using fractional reserve which just means it lends out all of those reserves at zero fractional reserve!

I am getting puzzled we are so far apart while you two obviously are knowledgable........it is weird so far

Edited April 29, 2009 by aliveandkicking

[A.steve]

Northern rock money only exists in the banks books or computer records. To enter the world outside of northern rock it has to go via the central bank if we take it at the transaction by transaction level in slow motion to observe reality being done as it would be if banking activity was tremendously slow.

You say my example has no money in reserve so cant be fractional reserve. How about i leave one pound in reserve and change the figures by 1 to satisfy that demand?

You say i neglect basel and capital adequacy..........i am not so sure but can be convinced if so

You say i dont have a deposit but i just got a deposit via a loan from the money markets at libor which is their savings which are surplus to their requirements they want to earn interest on

You must have heard of the crisis involving interbank short term lending and Mervyn king wondering out aloud if it would ever come back again?

You must have heard of regulators saying that banks must provision for difficulties in the shorterm lending market by sourceing longterm wholesale deposits?

I am not sure what is happening with this conversation but it is like we both inhabit alternate realities with neither able to understand the others point of view at all

Curious

Northern Rock money exists in the accounts of those people who sold their house to borrowers from NR... and the people from whom they, in turn, bought a car, and in turn the pocket of the waitress whom the car salesman tipped. Northern Rock money is everywhere and anyway. It's probably impossible to fathom all the transactions today.

Money is usually transferred between banks not via the central bank, as you argue, but using SWIFT. Banks settle up at the end of each day after netting.

Leave a pound, you get a reserve... but not fractional reserve - because that term relates to expansion of demand deposits. If the £1 was capital -i.e. shareholder equity - not a loan... then you'd have capital. Not enough to meet Basel capital adequacy rules - but a start. The capital should be enough for you to repay any demand deposits by borrowing from other banks (or the central bank if you scare everyone else silly) - covering the cost of borrowing using capital. Of course, once such a strategy is available, it seldom needs to be employed - because everyone trusts that you could. Of course, this is where SIVs enter the game - they're off balance sheet dummy corporations that evade the scrutiny of regulators and legislators... who seem either utterly unethical, stupid - or both.

I accept that you have a wholesale deposit - but yofu are not expanding deposits... rather you're financing lending... similar structure, different lingo.

"You must have heard of the crisis involving interbank short term lending and Mervyn king wondering out aloud if it would ever come back again?"

Of course, it was bonkers - Mervyn is effectively telling everyone that they're thick if they think that was normal.

"You must have heard of regulators saying that banks must provision for difficulties in the shorterm lending market by sourceing longterm wholesale deposits?"

Yes. The risk in banking (aside from default) is maturity mismatch. There is so much more that can go wrong borrowing £1000 on 52 separate occasions for one week than borrowing it once for a year. While borrowing for just a week is cheaper per week than per year (normally) the risk of unexpected costs is much higher... and, after the NR debacle, regulators must insist on more capital being set aside when bigger risks are taken... hence offsetting the potential profit from unnecessary risk taking.

I think I understand where you're coming from - I just think you're wrong about a number of facts.

[tomwatkins]

I lease cars from ford. You can rent them from me

Next

Not the same thing smart ass. You are lending the asset (the car) not the liability (the payment)

Next.

[A.steve]

Leverage and fractional reserve are the same thing but you might not have a specified regulated reserve

Oddly steve said because i had no reserve it was not fractional reserve! Whereas if i had not had zero fractional reserve and retained one penny he would have said ok fine.

Don't jump to conclusions - I was picking off the obvious errors first.

And you are saying that if a bank goes and gets one million reserves at libor for 5 years it is not allowed to lend those reserves using fractional reserve which just means it lends out all of those reserves at zero fractional reserve!

I am getting puzzled we are so far apart while you two obviously are knowledgable........it is weird so far

You can't (logically) borrow reserves... reserves need to be equity investments. I realise that some US banks claim they have borrowed reserves... I interpret this to mean "fundamentally insolvent and on special life-support while the Fed tries to work out what to do. Reserves are capital, not borrowing. Reserves must be invested - not lent. The reason for this is that business puts reserves at risk... but the liability of borrowed money does not shrink if a loss is incurred.

[Mr Nice]

Leverage and fractional reserve are the same thing but you might not have a specified regulated reserve

Oddly steve said because i had no reserve it was not fractional reserve! Whereas if i had not had zero fractional reserve and retained one penny he would have said ok fine.

And you are saying that if a bank goes and gets one million reserves at libor for 5 years it is not allowed to lend those reserves using fractional reserve which just means it lends out all of those reserves at zero fractional reserve!

I am getting puzzled we are so far apart while you two obviously are knowledgable........it is weird so far

again, I think there is a language interference.

I don't remember ever saying that a bank couldn't lend borrowed reserves, especially since a bank wouldn't lend out those reserves anyway.

it would borrow the reserves, then issue credit based on a multiple of the reserves borrowed.

reserves never leave the banking system (except obviously cash, but that is a negligible amount of transactions allowed for confidence)

[aliveandkicking]

Not the same thing smart ass. You are lending the asset (the car) not the liability (the payment)

Next.

If i borrow a car i dont see how it can be my asset. I am liable to return that car to ford

The payment to me is my asset because money is going to be given to me.

Perhaps you could rethink this please?

Ford lends their asset which is my liability

Ford also has the asset of my payment

I lend their asset which is my liability to return intact to them and my asset is whatever income i can earn by using their car

[tomwatkins]

Not the same thing smart ass. You are lending the asset (the car) not the liability (the payment)

Next.

BTW Mr. Alive and Kicking-that is first year ACA (basic stuff) and here you are ponificating about all sorts of stuff and you don't know basic accountancy (difference between assets and liabilities). Tut tut. You know the one that goes "better to keep quiet and be thought a fool than to open one's gob and remove all doubt". Now think next time.

Next.

[Kazuya]

BTW Mr. Alive and Kicking-that is first year ACA (basic stuff) and here you are ponificating about all sorts of stuff and you don't know basic accountancy (difference between assets and liabilities). Tut tut. You know the one that goes "better to keep quiet and be thought a fool than to open one's gob and remove all doubt". Now think next time.

Next.

What are you smoking? You just quoted yourself

[aliveandkicking]

again, I think there is a language interference.

I don't remember ever saying that a bank couldn't lend borrowed reserves, especially since a bank wouldn't lend out those reserves anyway.

it would borrow the reserves, then issue credit based on a multiple of the reserves borrowed.

reserves never leave the banking system (except obviously cash, but that is a negligible amount of transactions allowed for confidence)

One of us does not get it.

we agree reserves are cash equivalents

We agree we can borrow reserves either as cash from retail deposits or from another bank

Q. Do you agree these are wholesale deposits when borrowed from another bank at say libor 5 years?

Q Do you agree that if a bank borrows reserves from a bank that it pays those reserves to another bank if the loan is paid to a customer of another bank?

Q do you agree the bank is fully levering its reserves if it pays to another bank the reserves it borrowed from another bank when it has no reserves otherwise?

Q if the reserves remain with the bank and the bank credits a banks customer with the mortgage money do you agree we have a reserve of x and two deposits of X ie 50% fractional reserve

Could you please answer each question so we can resolve this most quickly

Edited April 29, 2009 by aliveandkicking

[aliveandkicking]

BTW Mr. Alive and Kicking-that is first year ACA (basic stuff) and here you are ponificating about all sorts of stuff and you don't know basic accountancy (difference between assets and liabilities). Tut tut. You know the one that goes "better to keep quiet and be thought a fool than to open one's gob and remove all doubt". Now think next time.

Next.

I am not brain of britain but eiji seems to be confirming an asset is something that is mine or gives to me and a liability is somthing that is not mine or takes from me

If you pay 100 cash into a bank the bank takes the cash as an asset in the vault as their property and it owes to you a liability for cash payable to you when you require it back

You do appear to have reversed the meanings of these words

[A.steve]

again, I think there is a language interference.

I don't remember ever saying that a bank couldn't lend borrowed reserves, especially since a bank wouldn't lend out those reserves anyway.

You're telling me - LOL!

You can't lend reserves, per-se, because then they'd not be in reserve... unless... of course, they were demand deposits... or there was some other strategy in place to rapidly liquidate the assets. Overnight lending at LIBOR isn't really lending... because the money is returned before anyone can ask a bank to repay it. The terms of lending are important... In a sense, reserves need to be lent - because all money is debt. What's critical about the reserves is that they are the excess asset value over fixed liabilities. In theory, if stock markets were rational and well informed (which they are not) the market capitalisation of banks would correlate closely with capital... less expected losses. As it is, it is the consensus opinion of a bunch of speculator trader nutters... but that's why people started to worry about banks' solvency when share prices plummeted. Equity investors stopped believing that banks were as profitable as they promised.

[tomwatkins]

I am not brain of britain but eiji seems to be confirming an asset is something that is mine or gives to me and a liability is somthing that is not mine or takes from me

If you pay 100 cash into a bank the bank takes the cash as an asset in the vault as their property and it owes to you a liability for cash payable to you when you require it back

You do appear to have reversed the meanings of these words

100 quid paid in-bank DEBITS cash on hand and credits the customer. Go in to a bank and ask.

[Mr Nice]

One of us does not get it.

we agree reserves are cash equivalents

yes

We agree we can borrow reserves either as cash from retail deposits or from another bank

yes

Q. Do you agree these are wholesale deposits when borrowed from another bank at say libor 5 years?

possibly

Q Do you agree that if a bank borrows reserves from a bank that it pays those reserves to another bank if the loan is paid to a customer of another bank?

not necessarily.

the banks would tally up their deposits and withdrawals from each other at the end of the day, and rebalance as necessary.

but I agree with it in principle.

Q do you agree the bank is fully levered if it pays to another bank the reserves it borrowed from another bank?

I'm not sure what you mean by fully levered, but if the bank borrowed 100 of reserves, then gave out a 100 loan to a customer, if those reserves had to be paid out to a different bank, the bank would be UNDER capitalised because it still has to have capital to cover the capital adequacy ratios.

[aliveandkicking]

You're telling me - LOL!

You can't lend reserves, per-se, because then they'd not be in reserve... unless... of course, they were demand deposits... or there was some other strategy in place to rapidly liquidate the assets. Overnight lending at LIBOR isn't really lending... because the money is returned before anyone can ask a bank to repay it. The terms of lending are important... In a sense, reserves need to be lent - because all money is debt. What's critical about the reserves is that they are the excess asset value over fixed liabilities. In theory, if stock markets were rational and well informed (which they are not) the market capitalisation of banks would correlate closely with capital... less expected losses. As it is, it is the consensus opinion of a bunch of speculator trader nutters... but that's why people started to worry about banks' solvency when share prices plummeted. Equity investors stopped believing that banks were as profitable as they promised.

I think you are missing a piece of information you need to understand this fully while believing i am not right in the head or something!

Why do i say that?

1 Of course you can lend reserves

2 Of course you can borrow and lend reserves at greater libor terms than overnight they go upto at least one year with many terms in between

Q do you understand the method of lending called lending using excess reserves where you lend out the excess reserves for each loan so you do this

100 reserves in the vault

retain reserve of 10

Lend 90 which gets spent to buy a product from another banks customer

10 Reserves remaining and you are loaned out

Then you get a deposit of 33 reserves

you have 43 reserves

you retain 5

you create a loan of 38 paid out as cash

5 Reserves remaining you cannot lend out unless you retain a fraction of 1 using the method of lending using excess reserves

Please let me know if you understand the method of lending using excess reserves where all loans are fully funded by reserves

Edited April 29, 2009 by aliveandkicking

[aliveandkicking]

yes

yes

possibly

not necessarily.

the banks would tally up their deposits and withdrawals from each other at the end of the day, and rebalance as necessary.

but I agree with it in principle.

I'm not sure what you mean by fully levered, but if the bank borrowed 100 of reserves, then gave out a 100 loan to a customer, if those reserves had to be paid out to a different bank, the bank would be UNDER capitalised because it still has to have capital to cover the capital adequacy ratios.

OK thanks

But you are now telling me that banks must keep a retained reserve which is an amount calculated via various rules they are required to operate under.

And we already agree that fractional reserve just means you borrow and lend

I dont get it!

Essentially we are saying absolutely the same thing!

[A.steve]

One of us does not get it.

Yes. One, at least.

we agree reserves are cash equivalents

No.

We agree we can borrow reserves either as cash from retail deposits or from another bank

No. Reserves can not be fixed liabilities. (Except where the Fed bends the rules and ignores solvency.)

Q. Do you agree these are wholesale deposits when borrowed from another bank at say libor 5 years?

No. Interbank lending tends to be for far shorter time spans. 3 months are typical... quotes are available for 1 to 12 month terms. Even money market lending tends to be for just 2 or 3 years.

Q Do you agree that if a bank borrows reserves from a bank that it pays those reserves to another bank if the loan is paid to a customer of another bank?

No. You can't borrow reserves - by definition. Even ignoring this, I've no idea what you're suggesting above.

Q do you agree the bank is fully levering its reserves if it pays to another bank the reserves it borrowed from another bank when it has no reserves otherwise?

No. A bank would have its maximum leverage ratio allowed by Basel 2 if it invested all the money it could borrow in gilts. It wouldn't likely do this, however, since it would likely cost more to borrow than the gilts would yield. Maximum leverage - minimum profit. Not a great goal to pursue.

Q if the reserves remain with the bank and the bank credits a banks customer with the mortgage money do you agree we have a reserve of x and two deposits of X ie 50% fractional reserve

Reserves, by definition, always belong to the bank. Reserves are not customers' demand deposits - demand deposits are assets and liabilities in equal measure. I don't think fractional reserve would allow a bank to move to 50% fractional reserve in one loan... but it could be done in a series of loans - providing the beneficiary of these loaned funds deposited them in the same bank. If the loaned funds end up in another bank, some assets - for example, the mortgages must be sold or transferred in order to meet the mortgage issuing bank's daily payment deficit.

So, not really - but, possibly, only an objection based upon terminology.

Could you please answer each question so we can resolve this most quickly

Done.

[Alan B'Stard MP]

You can end this argument once and for all. If I deposit 100 quid-that is a liability on the bank. It is a demand deposit call it what you will. The bank cannot lend a liability-in fact no business can. Therefore something else is going on. Someone earlier said that the DVD "Debt as Money" is misleading in parts-it is but the title is 100% correct. New money is created as debt, by and large.

You deposit 100 quid. That's a cash asset. This is now the banks cash-asset. You've lent it to the bank.

It's goes to their cash-ASSET account. Your liability deposit account is journalled for 100 to denote the debt they owe you.

[Alan B'Stard MP]

No.

Reserves are cash equivalents. They are birthed by the central bank and owned by the commercial bank. They are fully drawable in exchange for notes.

Current accounts at the central bank are only central bank-in-origin monies.

We have a two-tier currency system with both currencies priced the same.

Edited April 29, 2009 by Alan B'Stard MP

[A.steve]

Q do you understand the method of lending called lending using excess reserves where you lend out the excess reserves for each loan so you do this

I think it a deeply flawed way to conceptualise what is going on.

[aliveandkicking]

100 quid paid in-bank DEBITS cash on hand and credits the customer. Go in to a bank and ask.

The customer is credited with an iou for cash. Which means the bank has a liability to pay out cash

The bank though has more cash on hand,

I suspect the bank credits the vault cash with physical cash and credits the customer with the banks commercial bank money

I am not an accountant. I am more familiar with asset and liability as used by banks, but routinely customers receiving money are credited with money and customers losing money are debited money

So what you say does not make sense to me

[A.steve]

Reserve are cash equivalents. They are birthed by the central bank and owned by the commercial bank. They are fully drawable in exchange for notes.

Current accounts at the central bank are only central bank-in-origin monies.

Not really.

Some might be.

Bizarre claim.

False.

(I'm getting tired now!)

[aliveandkicking]

I think it a deeply flawed way to conceptualise what is going on.

It is the method described by the federal reserve bank of chicago in modern money mechanics

http://upload.wikimedia.org/wikipedia/comm...y_Mechanics.pdf

[Alan B'Stard MP]

Not really.

Some might be.

Bizarre claim.

False.

(I'm getting tired now!)

Banks do not create FIAT. It is fraud. Bank accounts only contain 1 classification of money. Central bank accounts are narrow money.

[A.steve]

It is the method described by the federal reserve bank of chicago in modern money mechanics

http://upload.wikimedia.org/wikipedia/comm...y_Mechanics.pdf

I've not found the words you used. I suspect that you're missing rather a lot of context... or assuming definitions for terms that aren't quite right.