Flow of Money - Payment System
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- čas přidán 30. 09. 2015
- How the Domestic & International payment system works. Revised from original version.
Challenge Question:
1) Is it possible for banks to "lend out" reserves?
Terms:
Fedwire - a wire transfer service offered by the US Federal Reserve that debits and credits member bank accounts.
Clearinghouse Interbank Payments System (CHIPS) - a private clearinghouse that accumulates daily transactions from member banks and settles at the end of 24 Hours. As much as 95% of all dollar transaction use the CHIPS service, this includes international transactions also.
Society for Worldwide Interbank Financial Telecommunication (SWIFT) - A private company headquartered in Belgium. SWIFT maintains a network of international wire transfer protocols. Most international wire transfer communication occurs in the SWIFT format.
Thank you so much for this explanation! I was surfing youtube for like 1 hour, wading through hundreds of shallow and sketchy explanations whose authors don't really even know what they are talking about. The average low level of people's understanding of the subject astonished me. I myself am a software developer and must say that the average developer-related youtube video is of much better quality, while in finance everyone on yt seems to "know everything".
This one came as a breath of fresh air, thanks again.
Best explanation that I have seen
Amazing way of explaining. You nailed it! Thanks for such a brilliant video book.
Thank you for the very informative video Wayne.
Excellent, as usual!
Excellent, well-structured explanation!
0:23 Review of Balance Sheets.
2:02 Single Bank Transaction.
2:51 Bank Deposits settle most transactions.
3:39 Federal Reserve Balance Sheet.
4:56 Two-Bank Transaction with Federal Reserve.
7:05 Fedwire.
7:30 Clearinghouse Interbank Payment System (CHIPS).
9:01 International Transaction.
12:39 Dollar as the Reserve Currency.
Well done! Thank You.
Thanks. Great explanation
Absolutely first rate, thank you
wow thank you... hard to find a good explainer for this
This is the best video that make me understand payment system
essential content. Thanks for the insights
Thanks a lot for that video
Good stuff
I besically dont comment in youtube video but after watching this video i couldnt resist my self....Excellent unparalleled video that I have come across in CZcams .....if the video quality was a little bit higher it would be more awesome.
Brilliant .
Best video!
Damn bloody brilliant
Excellent
Hello Wayne. I was wondering, can banks create a loan in other currencies(while they don't have it in its reserves). I am from the country where is the foreign currency reserves deficit, and no one can exchange their money to foreign currencies. Because there is no foreign currency in reserves of banks(As i know). So I was wondering can our banks create a loan which is, for example, is denominated in USD? If it can, I think also can send this money (USD) to another country by using correspondents account in foreign countries bank(by just debiting my deposit and credit this amount to correspondents account of a foreign bank which is held in my bank. Am I right or wrong in my thoughts? Could you please explain me about this?
And also thanks for your great videos!
*CHALLENGE QUESTION:*
1) Is it possible for banks to _"lend out"_ reserves?
no, banks do not lend out reserves to customers. but they can lend them to other banks. I hope my answer is correct :)
I guess that would depend on the central bank. If a private individual can directly hold reserves in their account, it means they have a line item directly with the fed (the private bank has transferred ownership of this liability to them). It doesn't seem like that's possible. If not everyone would rather bank with the central bank since their liabilities are the most solid.
No, reserves are what they have left over after they lend out
I am really confused by this what's use of reserves really? If bank lending is not constraint by reserves.What is use of reserves??
@@shubhamsingla9340 Banks are constrained by the _price_ of reserves. If the price is too high, the bank could be unprofitable.
However, most reserves are not needed. In systems with zero reserve requirement banks end up holding around 3% reserve ratio.
3% would represent the reserves demanded in a *full trust* environment. So long as surplus banks are willing to lend their reserves to banks with a reserve deficit, then the system works fine. But what if banks won't lend to each other, during a financial crisis for example?
Then, the central banks will act as Lender of Last resort, and injects as many reserves are needed to target a specific price (interest rate).
Here is an example of a system that has zero reserves...works great so long as banks are always willing to lend, but in reality banks nurture a reputation. If your reputation gets low enough, no one will lend to you.
czcams.com/video/2b4oBcD_nQw/video.html
Great videos! I'm wondering if there is a good textbook that you could recommend for additional information regarding these topics. thanks!
Hey Clayton,
Im glad you enjoyed the video :)
For introductory macroeconomics textbook try:
Blanchard / Fischer “Lectures on Macroeconomics”
Or
Krugman / Wells “Macroeconomics”
If you interested in modeling try:
De la Fuente “Mathematical Methods and Models for Economists”
For statistics:
Hogg / Craig “Introduction to Mathematical Statistics”
For some less formal reading:
Keen “Debunking Economics”
Fox “The Myth of the Rational Market”
Mosler “the Seven Deadly Innocent Frauds of Economic Policy”
Thanks for watching!
-Wayne
Nice
Thanks ,this is good stuff, I am just curious, in the case of international clearing, does ICBC summarize multiple transactions into one at the end of the day to get cleared in the US or each transaction get cleared individually? If a person has two US dollar accounts in beijing with ICBC and another Chinese bank say CCB and he made a USD transfer of 1M, does it have to go through the US for clearing?
Hi Kc,
International Banks operate in a very similar fashion to domestic banks, so yes, they accumulate transactions in the CHIPS system before clearing . Some international banks will hold deposits at a domestic correspondence bank, so instead of dealing directly with US Reserves they use an intermediary to clear transactions. In this case, the foreign bank's private deposits are instantly credited/debited, unless they have a special arrangement with the domestic bank (which is often the case).
Do foreign banks use US clearing systems to exchange US dollars? Yes, whenever US dollar reserves are transferred between banks, foreign or domestic, it is recorded on the ledger of the The Federal Reserve. (there may be some marginal exceptions where foreign banks have special arrangements, but these are few). If you want some more material on international clearing, I have a video on foreign exchange that you might enjoy.
czcams.com/video/ghHnZADyRQw/video.html
Thanks for watching!
Wayne
Excellent. But I wished if the graphs were bigger. I struggled to read the numbers. Thanks!!
Excellent explanation. Thank you! One question I still have is: how does a country get USD reserves at the Fed in the first place? Like in the example, ICBC and Bank of China have US reserves, but how? Because I'm wondering, if trade is imbalanced, with the country spending more USD than it gains, how does that work? How can a country "top up" their reserves at the Fed in that case?
They export stuff out of the country - sell it to get dollars. They can also issue Dollar denominated debt (Bonds). This is what brings them into trouble later on if the Dollar denominated debt is too large, and then they need to fallback to the first solution - export all their goods to the world while import less - Austerity.
Wayne, how would the transaction mentioned at 12:20 take place? If the Chinese branch of ICBC decides to get its Yuans at the China central bank, would the China central bank get credited by $100 in the Federal Reserve and then increase ICBC reserves by 600 Yuans? Would these 600 Yuans be brand new money created?
+RGV
ICBC New York would be transferring $100 to the Chinese Central Bank, who is now holding the US reserves. This transaction eliminates the accounts payable to ICBC Beijing - ICBC New York is back in its original position. Next, The Chinese Central Bank credits the yuan reserve account of ICBC Beijing with _new_ yuan, which eliminates the accounts receivable entry (swaps it for reserves).
Not every Central Bank will exchange currency for banks, and this type of thing is frowned on - it is overt currency manipulation. Normally, if ICBC Beijing needed the Yuan, they would need to find another bank who needed dollars, in a forex market. Currencies are suppose to _float_ against eachother in the open forex market. Exchanging dollars for new printed Yuan is how The Chinese central bank maintains their _peg_ with the US dollar.
Question about the transaction that happens at 13:25. If the international trade is all compensated in the Federal Reserve only, how does trade deficit affects the exchange rates if the dollars don`t ever really enter or leave the foreigner countries?
+RGV
Even though the dollars are in an account at The Fed, doesn't mean they are being used in the American economy - they are controlled by a foreign entity just like you control your bank deposits. Hypothetically, the foreign bank could just sit on the dollars and never use them again - this is the digital equivalent of mattress-stuffing. =P
The US Dollar acts strangely in exchange markets because there is such a huge demand. Our Treasury is recirculating our [huge] trade deficit at near zero percent, and the entire world is still screaming for more dollars. I have a working theory that global deflationary trends in developed economies, and inflationary trends in developing economies is all caused by a massive dollar shortage.
This is shown in the rising exchange rate of the dollar, and collapsing dollar denominated commodity prices (oil, gas, etc.).
Yes i would also agree on that theory because it is hard to find out what is causing so much problems in developed countries.It is simply not working here in the EU where I live the economy.I think that also euro is part of that problem because it is also high against other currencies.But here in the EU is more the thing of huge debt in countries.You actually answered to my question in the next question of RGV but how does trade deficits affect exchange rates I mean that you said never use them again but that is also the same thing as China that is holding these reserves and not use them.
žiga Mahne Yeah, the strong US Dollar is damaging developing countries in the same way that the gold standard damaged economies during the Great Depression. The world abandoned gold during the 1930s because there wasn't enough it, they might do the same to the US dollar. ;)
The Eurozone has special problems because there is a disconnect between fiscal and monetary policy - you have one central bank, and 19 treasuries - this creates big problems when one member runs a surplus against another (e.g. Greece & Germany). =/
Thanks for watching! =)
Why is the Belgium company required, or the swift transaction required between New York and Beijin branches if they are the same bank? Why don`t they keep it as an internal transaction only like it happens when 2 clients of the same bank send money to each other (as shown in the first example of the video). Why when the transfer is international these third party is required? Sorry for so many questions, please take your time :P
+RGV
_"Why is the Belgium company required, or the swift transaction required"_
The Society for Worldwide Interbank Financial Telecommunication maintains standard universal protocols and security that is trusted by banks everywhere. Technically, they don't _have_ to use SWIFT, but other banks would not likely do business with you. Basically, it is a trusted network, not a bank or clearinghouse.
Happy to answer questions! =)
So when a foreigner Government announces the country currently holds U$ X billions in international reserves in USD, it means the sum of its centrall bank reserves in dollars PLUS the reserves of the banks of that country in dollars in their accounts in the FED? If a country (that not the US) runs out of these international reserves how can they keep importing?
👍
"US dollar as international reserve" In your example of the $100 purchase in which moment does that transaction affects the exchange rate of both currencies? You said ICBC has 2 options to clear that transaction, one being to sell the U$100 in the Forex market to get Yuan (in this moment it would affect the exchange rate, right?), second option would be ICBC New York to transfer those $100 to the China central bank account in the FED and the China Central bank to pay the ICBC branch in China with Yuan. In this case I don't see how the exchange rates should be affected since the Chinese (or any country`s) central bank in this scenario would have to create new money to make that payment (meaning the Yuans wouldn`t be bought with dollars in any currency market), no?
+RGV
_" in which moment does that transaction affects the exchange rate of both currencies?"_
The moment that ICBC New York settles its payable to ICBC Beijing. If they exchange the dollars with their Central Bank,the US Reserves become a tool of the PBOC to peg their currency to the US Dollar in forex. If ICBC settles the payable/receivable in a Forex market, this directly affects the exchange rate. If a trend develops where the demand for Yuan excedes the demand for Dollars in forex markets, then the dollar will depreciate.
Of course, China maintains a close peg, so in this specific case, there would likely be no exchange rate consequences. How does China support the Dollar? By hording Dollar reserves....not using them.
+Wayne Vernon eager for the Forex video, with a payment example that involves the US and another that involves 2 other countries, that would be gold :)
If they exchange the dollars with their central bank
The ICBC of New York exchanges dollars with Central Bank of China? How will this book entry goes?
Will they(ICBC New York) exchange accounts payable with Us Dollar reserves on the asset sied of the PBOC or will they exchange US Reserves of ICBC New York with PBOC US Dollar Reserves?
What happened then with accounts payable on the ICBC in new york and accounts receivable (ICBC Beijing)?
The US Reserves in ICBC New York are matched with PBOC US Dollar Reserves, yes? The PBOC US Dollar Reserves are matched with Reserves(China) at the FED,yes? If thats right it means that if ICBC New York
sells all 1.100 US Reserves to PBOC the asset side of PBOC will get credited with 1.100 Dollars?
So the PBOC will have 2.100 Reserves.But isn't that drainage of Dollars from the US?I mean they get back on the liability side of the FED as Reserves(China) the FED will than have 2.100 Reserves(china).Is then ICBC branch in New York bringing US Dollar reserves from US to China? How will then PBOC change Dollars to Yuan? PBOC then goes to forex market and exchanges there?
žiga Mahne Here are some examples of foreign exchange transactions. ;)
czcams.com/video/ghHnZADyRQw/video.html
But US Reserves in PBOC bank are matched with those on the FED balance sheet Reserves(China) right?
Wayne,
Enjoyed finding your comments, your site and your vids.
Please be in touch.
joebhed ATT verizon DOT net
joe B
"Dollars never leave the United States". How countries like Ecuador (which has the US Dollar as its official currency) get dollars to run their economies?
Hey Wayne, I have been still trying to figure this out but haven't found much about how it works for countries with USD as their official currency. I have only found an article in Russian explaning how cash dollars enter Russia to cover the demand for cash dollars (most Russians save in dollars). The article basicaly says that russian banks transfer eletronic dollars to american banks such as Citibank and Banks of America (I believe they are talking about reserves in their FED accounts according to your class), the american bank takes a percentage up to 2% for their service and then send the cash dollars to russia in airplanes (U$250 million in each airplane maximum due to insurange limitations). The article says in March 2015 (Crimea crises period) this flow reached U$5 billion a DAY (20 airplanes)! So I assume when you mentioned "dollars never leave the United States" you meant eletronic dollars correct? Any guess of how it works for countries who have as USD as their official currency? Ecuador has a negative balance of trade, and their interest rate is 9.15%. How do they manage to get dollars in order to be able to spend more than collected in taxes and to pay interest? By making loan in foreigner markets and increasing their international debt?
+RGV
_" I assume when you mentioned "dollars never leave the United States" you meant eletronic dollars correct?"_
Yes, electronic dollars, which accounts for 97%+ of dollar transactions. However, because US dollars are a popular savings vehicle, it is not uncommon for entities to ship _physical_ dollars out of the US. In the case of Ecuador, their central bank literally went to the Federal Reserves and withdrew the physical cash notes and shipped them back home. There are great risks associated with transporting physical dollars, but it does happen. Saddam Hussein had stashed away over a billion physical US Dollars, for security...ironic!
Ecuador, and a few others are unique because they circulate physical US Dollars...Not a bad idea if the local currency is struggling, although Ecuador basically gave up sovereignty over their currency, which can be good or bad, depending. =P
But yes, you are correct, physical notes do get exchanged internationally, but they are a very small part. =)
+RGV
_" I assume when you mentioned "dollars never leave the United States" you meant eletronic dollars correct?"_
Yes, electronic dollars, which accounts for 97%+ of dollar transactions. However, because US dollars are a popular savings vehicle, it is not uncommon for entities to ship _physical_ dollars out of the US. In the case of Ecuador, their central bank literally went to the Federal Reserves and withdrew the physical cash notes and shipped them back home. There are great risks associated with transporting physical dollars, but it does happen. Saddam Hussein had stashed away over a billion physical US Dollars, for security...ironic!
Ecuador, and a few others are unique because they circulate physical US Dollars...Not a bad idea if the local currency is struggling, although Ecuador basically gave up sovereignty over their currency, which can be good or bad, depending. =P
But yes, you are correct, physical notes do get exchanged internationally, but they are a very small part. =)
That is also the case with Montenegro the former Yugoslav republic they use Euro but they are not in the Euro area.
ahh SPEAK UP. can't hear you! but nice video..
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