Banks Borrow Money Into Existence, But Not At 0% Interest

[domo]

aahh banking discussions. Good times. Good times.

[davidhpc]

no they don't.

if you've ever had a mortgage when did you ever SEE all that money??

never, it never stopped being debits and credits in the banking system for the most part.

the bank credits your account with 100k, you write a check to the homebuilder for the house. he deposits it back into the bank.

he might take a little out to pay employees, but thats also through check or direct deposit.

he may get a little cash out of the ATM here and there, but the vast majority of all money created stays in the system and never has to be more than debits and credits.

the bank has to have money in any case, whether it wants to transfer it electronically or cash or whatever.

if you think banks can just type numbers and send them to each other, then it really is worse than I thought.

this is voices from the microwave and martians coming out of the telly stuff.

[Mr Nice]

the bank has to have money in any case, whether it wants to transfer it electronically or cash or whatever.

if you think banks can just type numbers and send them to each other, then it really is worse than I thought.

this is voices from the microwave and martians coming out of the telly stuff.

as long as the money created by their typing is balanced by an equal asset like a mortgage, they can and do.

[davidhpc]

that doesn't even make any sense.

every step balances in the real world.

100 in is a LIABILITY for the bank and an ASSET for the depositor.

they are in effect getting paid a perpetual interest only rental on their money.

you don't have to loan it out again for it to balance.

its showing two transactions some money coming in and some money going out.

balances up fine.

yours goes like this

100 in balance goes up 100

add 100 on, and then take 100 out, balance stays the same

seems a bit odd.

[Mr Nice]

its showing two transactions some money coming in and some money going out.

balances up fine.

yours goes like this

100 in balance goes up 100

add 100 on, and then take 100 out, balance stays the same

seems a bit odd.

please re-read the post?

when the bank credits you 100k for a mortgage their balance doesn't go "down."

it is balanced by the mortgage created.

all one step

[davidhpc]

as long as the money created by their typing is balanced by an equal asset like a mortgage, they can and do.

right that's it. i'm off.

[benj]

that's not how it works, unfortunately

ok then. feel free to make your own banking system up then.

LOLOL!

That is indeed how it works.

If I walk into the bank with £100 and deposit it, the bank gains two things:

(1) assets worth £100, in the form of banknotes, which now belong to the bank, and not me;

(2) liabilities worth £100, because they owe me £100 payable on demand.

If I transfer money into my account electronically instead, the result is eventually the same - the electronic transfer results in £100 of central-bank money (equivalent to a banknote, because it's just a debt of the BoE) being transfered between the two institutions via CHAPS or what-have-you.

[Bloo Loo]

Bet hes off to buy a box of Sage Instant accounting

[Bloo Loo]

its showing two transactions some money coming in and some money going out.

balances up fine.

yours goes like this

100 in balance goes up 100

add 100 on, and then take 100 out, balance stays the same

seems a bit odd.

I suggest you buy a copy of Sage instant accounts and create some entries.

Incidently, the £100 they now have in their vault, a liability, they would do another entry to move that money into another account, ie they internally borrow it from the clients account. Its another stage in the bookeeping, but you knew that anyway.

[Bloo Loo]

double entry double posted.

Edited February 29, 2008 by Bloo Loo

[Mr Nice]

ok then. feel free to make your own banking system up then.

LOLOL!

That is indeed how it works.

If I walk into the bank with £100 and deposit it, the bank gains two things:

(1) assets worth £100, in the form of banknotes, which now belong to the bank, and not me;

(2) liabilities worth £100, because they owe me £100 payable on demand.

If I transfer money into my account electronically instead, the result is eventually the same - the electronic transfer results in £100 of central-bank money (equivalent to a banknote, because it's just a debt of the BoE) being transfered between the two institutions via CHAPS or what-have-you.

that would imply that there is enough banknote equivalency in the system to cover all of the deposits in the commercial banks.

the difference between m0 and m4 levels would say otherwise.

Edited February 29, 2008 by Mr Nice

[Bloo Loo]

tired and bored

Edited February 29, 2008 by Bloo Loo

[Mr Nice]

Bet hes off to buy a box of Sage Instant accounting

I wish

[benj]

that would imply that there is enough banknote equivalency in the system to cover all of the deposits in the commercial banks.

the difference between m0 and m4 levels would say otherwise.

No, it doesn't imply that. That's the whole point.

If a sufficient number of a bank's depositors come and ask for their cash, or equivalently ask the bank the transfer their money to another institution, then the bank will run out of banknotes and/or money in its account with the central bank, and it will be stuffed.

In a 100% reserve system, this cannot happen. But that's not what we've got.

[Mr Nice]

the customer deposit is both a liability AND an asset. you can only lend what you have.

customer A gives bank money - LIABILITY to the bank (bank owes customer A money now).

bank lends this money out to customer B - ASSET to the bank (customer B owes the bank money).

LOLOL!

That is indeed how it works.

If I walk into the bank with £100 and deposit it, the bank gains two things:

(1) assets worth £100, in the form of banknotes, which now belong to the bank, and not me;

(2) liabilities worth £100, because they owe me £100 payable on demand.

If I transfer money into my account electronically instead, the result is eventually the same - the electronic transfer results in £100 of central-bank money (equivalent to a banknote, because it's just a debt of the BoE) being transfered between the two institutions via CHAPS or what-have-you.

you are truly saying that it takes two transaction to balance the deposit on the books?

if so, which side do you put the deposits on when figuring the CAR?

Edited February 29, 2008 by Mr Nice

[benj]

you are truly saying that it takes two transaction to balance the deposit on the books?

I'm not. Don't know about the other guy.

if so, which side do you put the deposits on when figuring the CAR?

I don't do that very often.

If I did, I'd treat any banknotes that the bank had in its possession as part of the bank's risk-free capital (Tier 1), along with the shareholders' equity and all that. And I'd treat any loans the bank has made as part of their risk-weighted asset base. And I'd treat any loans that have been made to the bank (e.g. by depositors) as part of the capital base.

[mfp123]

you are truly saying that it takes two transaction to balance the deposit on the books?

if so, which side do you put the deposits on when figuring the CAR?

no, im telling you the origin of where the bank gets/creates its assets from. its not conjured from thin air. it comes from using customer deposits.

the cash sits at the bank, but strictly speaking doesnt belong to the bank so its not recorded as their asset. but that doesnt mean that the cash doesnt exist. only when the cash is loaned out is it an asset recorded by the bank.

Edited February 29, 2008 by mfp123

[Bloo Loo]

no, im telling you the origin of where the bank gets its assets from. its not conjured from thin air. it comes from using customer deposits.

the cash sits at the bank, but strictly speaking doesnt belong to the bank so its not recorded as their asset. but that doesnt mean that the cash doesnt exist. only when the cash is loaned out is it an asset recorded by the bank.

the money asset is created on the strength of a REAL thing of value.

Why is this so difficult? you cant take a house to tescos to buy bread. You change your house into money, where you can put it in your pocket, on your credit account wherever. Its not hard. The money represents the house. it is manufactured to look like a REAL thing of value.

Money itself comes out of thin air, the value of it comes from the things it was lent against in creation.

[Injin]

double entry double posted.

Are you a banker?

[algobet]

the cash sits at the bank, but strictly speaking doesnt belong to the bank so its not recorded as their asset. but that doesnt mean that the cash doesnt exist. only when the cash is loaned out is it an asset recorded by the bank.

incorrect.

when a bank takes a deposit in cash the double entry is:

dr cash

cr customer deposits

fact. simple as.

[Mr Nice]

I'm not. Don't know about the other guy.

I don't do that very often.

If I did, I'd treat any banknotes that the bank had in its possession as part of the bank's risk-free capital (Tier 1), along with the shareholders' equity and all that. And I'd treat any loans the bank has made as part of their risk-weighted asset base. And I'd treat any loans that have been made to the bank (e.g. by depositors) as part of the capital base.

so in NEITHER case (cash or non-cash monetary deposits do you consider them in the liabilities section? they are always capital?

[algobet]

so in NEITHER case (cash or non-cash monetary deposits do you consider them in the liabilities section? they are always capital?

deposits on a balance sheet are liabilities but deposits in a capital adequacy calc are 'capital'.

[Sinking Feeling]

thats just not true

when the bank gives a loan like a mortgage and credits your account for say 200k, the mortgage itself is the asset. the 200k credited to you is the liability.

thats why assets and liabilities always match (roughly)

in fact, the mortgage is worth slightly more than the 200k (because of interest payments) which is how the banks can sell them on to the money markets for a profit.

I don't dispute that!

[Mr Nice]

deposits on a balance sheet are liabilities but deposits in a capital adequacy calc are 'capital'.

I disagree.

Cash (notes, coin) would be an asset possibly but an accounts positive balance isn't. They are two different kinds of things.

say for example your bank is making a profit, and someone donates 1000 to you in cash, why I have no idea.

that money would be your's, free and clear. an asset.

if you transfer funds from a different bank into the your account , it is not the bank's free and clear. it is a liability to them, since you can withdraw it at your leisure (roughly).

if you deposited cash, the actual cash notes would be a bank asset, but the money they they credit to your account for receiving it wouldn't be.

if you have a link or something that shows differently, I would honestly like to see it, but I doubt it seriously.

you would then be in the situation where the deposits AND the loans given are considered assets in the CAR making it kind of worthless.

Edited March 1, 2008 by Mr Nice

[algobet]

I disagree.

Cash (notes, coin) would be an asset possibly but an accounts positive balance isn't. They are two different kinds of things.

say for example your bank is making a profit, and someone donates 1000 to you in cash, why I have no idea.

that money would be your's, free and clear. an asset.

if you transfer funds from a different bank into the your account at the same bank, it is not the bank's free and clear. it is a liability to them, since you can withdraw it at your leisure (roughly).

if you deposited cash, the actual cash notes would be a bank asset, but the money they they credit to your account for receiving it wouldn't be.

if you have a link or something that shows differently, I would honestly like to see it, but I doubt it seriously.

you would then be in the situation where the deposits AND the loans given are considered assets in the CAR making it kind of worthless.

sorry no youre right Mr Nice. im happy to stand corrected. liabilities dont come into the cap' ad' calc'. its actually capital (as defined by the country's banking rules) over risk weigthed assets (as defined by the country's banking rules) which gives the ratio.

heres an excellent link to read for anyone who want to see an example calculation. jump to the example near the middle of the page for a quick view

capital adequacy calc example

"Capital adequacy ratios measure the amount of a bank's capital in relation to the amount of its risk weighted credit exposures. The risk weighting process takes into account, in a stylised way, the relative riskiness of various types of credit exposures that banks have, and incorporates the effect of off-balance sheet contracts on credit risk. The higher the capital adequacy ratios a bank has, the greater the level of unexpected losses it can absorb before becoming insolvent."