Banks don’t loan out depositor’s money
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- čas přidán 11. 09. 2024
- Most people think banks take in deposits from people and then lend that money to those who want to borrow from them. Nothing could be further from the truth. Banks take deposits and make loans, but they don’t lend out depositors’ funds. Nothing could be further from the economic truth.
#uk #money #economic #politics #bank
The Economic Truths Series:
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2. You’ve got no money in the bank
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3. Banks don’t loan out depositor’s money
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Richard Murphy is Professor of Accounting Practice at Sheffield University Management School. He is director of Tax Research LLP and the author of the Funding the Future blog. His best known book is ‘The Joy of Tax’.
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Love the way he skates over the obligations banks have to settle any outstanding debts they may have at any time as though it’s a mere technicality!! Don’t let the truth get in the way of a good CZcams title!😂😂😂
Its not a technicality. It is in fact how banks go bust.
It does not alter the fact that banks create money and ceteris paribus do not go bust.
@@evildrome I will split a hair with you here.
I see a lot of writing that says a bank creates money. These days no single bank does, except perhaps in the case where it issues a private currency (something which was quite popular in 19c America but which fell out of favour with the rise of the Fed). Bitcoin, for which I am no expert, also seems to be a form of private currency.
But leaving that aside, banks only create or destroy money by transacting with each other. In the same way as I cannot create GDP on my own, I can only do this by transacting with someone else.
If banks could create money they could create their own funding and I can assure you they don’t.
I haven't deposited my money with my bank.
I have loaned my money to my bank.
But they cannot loan your money. So when you went to spend it you cannot get it back when you want. So no you have not loaned the bank money. If we take your example a step further, your employer puts your salary into your bank account every month, the bank says sorry you cannot have your salary this month we have lent it to Microsoft. What are you going to say? No money for food, rent or mortgage, no utility payments and forget going to work as you will have no money for gas or transport. Got kids well they are going to starve for a month.
Bank need to maintain minimum deposits, that allow then to borrow more money and earn bigger profits. If what you say is true all banks would give the same absolutely allowed minimum allowed interest on deposits. That is simply not true.
Money being created from nothing for QE and Money "disappearing" when a loan is repaid. So how did the UK economy work prior to 1931 when it was using the gold standard? Gold doesn't appear and disappear. Why should I trust a governments promise of repayment rather than a currency backed by gold?
Indeed. You sign a contract (for example mortgage),, your bank enters that in its double entry accounting system, as a credit. Then, it issues you the loan, and enters it as a debit. Of course the loan is always secured by a collateral. So, risking nothing, the bank lends you your own "money" you just issued by your signature. For this "financial service"the bank charges you the interest. Plus all other things, like insurance, fees aso. No bank would issue an unsecured loan.
Learning everyday with Richard .
It depends on the form of contact between the borrower and the bank. If the bank gives the permission of overdraft including secured ones and credito cards ( apertura di credito ipotecaria or other secured overdrafts facility), the Total of overdrafts existing can't exceed the current accounts positive Total amount plus the operational reserve. If a personal loan or a mortgage Is given this applies when the cheque given by the borrower tò the seller Is deposited in the system or another branch the same bank, as you also said in the "loans create deposits" video
Not quite true- deposits are required for their liquidity ratio. So the amount banks can lend depends on deposits. Is it the 'same' money? Invalid question- money is fungible.
You've said this many times, and again I think it's misleading. If you deposit money in a bank then that bank receives central bank money. The bank effectively needs central bank money in order to lend, because loaned monies get transferred to other banks; the bank sends central bank money. Not that deposits are the only way for a bank to get central bank money.
@user-rk9it9hz6g Deposits are a negative for the capital because they're in the liabilities column. Bank Capital is assets-liabilities. This "imbalance" is also the shareholder value.
They can borrow reserves if needs be and the system is full of them anyway, but it is true that reserves follow deposits. Also the loaned monies flow in every direction.
And depositors money is actually probably the biggest headache for a bank to manage, because everyone could suddenly demand it back without notice!
Commercial banks do not lend out depositors funds.
They buy 3 - 5 year treasuries using depositors funds and they arbitrage the interest rate. So they might get 5% from government & pay you 2%.
If you want your money back in a hurry, the bank can cash in its treasuries.
This is not without risk.
SVB bought treasuries with depositors funds at 0.5%.
And that would have been fine but the Fed raised interest rates very rapidly and SVB took a gamble.
Rather than do "portfolio balancing" where you swap your low interest bonds for higher interest bonds and take a bit of a haircut, they held onto them in the hope that depositors would not withdraw their money.
That didn't pan out and they were forced to firesale their low interest bonds and the price they got did not cover withdrawals.
What they should have done was what everyone else did and get out of 3-5yr T-Secs and into Money Market Funds which use short dated bills and notes rather than bonds.
The MMF's offer the highest returns in a market with rapidly rising interest rates and allow you to pay your depositors the best rate which encourages them not to withdraw their funds.
Fractional reserve backing. Produce money out of thin air and charge interest on it. They can’t lose. Also give savers 0% interest and charge borrowers 5%.
They have been doing this for centuries.
If that were true then banks would never go bust.
Hi Richard . So all banks would collapse if there was a run on them and ‘reserves’ are very low. The vast majority of money created by the banks is in the form of debt ( about 96-97% ) . What happens to the economy when there is a big drop in lending ? In a property market slump for instance ? Thanks
You are saying commercial banks can print money?
I don't think this is correct. You say things but nothing to back it up. Central banks create new money, only, was my impression and fractional reserve banking exists.
not exactly, they create bank deposits from loans. If you want to extract that deposit as cash, they have to use a bank reserve to settle it with the BoE. Central banks create reserves. Fractional reserve doesn't really exist (edit: in the UK, US etc)
@@downshift4503 What do you mean "they" create bank deposits from loans? Are you saying people deposit money into the bank and "they" get a loan for the same amount? I don't understand this statement.
@@antonyjh1234 commercial banks. When you take out a loan they create the loan asset for themselves (their asset) and create a deposit for you (their liability) that is held in a deposit account.
When banks make loans they dont provide cash they provide credit. This is what they mean when they say they make money out of thin air. This is why our "money" is 85 percent credit. Banks lend credit not actual money.
Technically what they do is they agree to keep a record of your debt and stand guarantor if you default.
Which is not at all what they say they're doing.
My mortgage is £700 a month.
Default insurance, which is what the bank has actually provided, is £25 a month.
How do I get a copy of the Bank of England's Published Paper on this Subject? Thank you for Responding to my question
So it's true then, money really DOES grow on trees!
No acknowledgement for Professor Werner?
So True!!!
Where does fractional reserve banking come into MMT or are you still insisting that banks don't lend depositors money?
Most bank lending is funded by capital markets
That begs the question, "Where do the banks get the money from to lend out?" Also, if what you say is true, why should the bank pay any interest on savings accounts? They get no advantage from providing the savings account. In fact, I expect each savings account adds to the banks accounting costs, so I would expect the banks to charge a fee on savings accounts.
Private banks simply credit an account to create money, ie. they type numbers in a ledger. And they are forced to pay interest by govt regulation in exchange for the audacious privilege of creating money and charging interest on it
@@WarrenPeaceOG Thanks for that. Just one question Who do the banks pay the interest to, for as you say, "in exchange for the audacious privilege of creating money and charging interest on it"?
@@GordonMiltons I think they call it income, pay staff, profit
Superb. It is way overdue that the people were given the truth of how the banks work. Thank you for providing this.
So. From this we can conclude.
1. That the Banks do not need our money for savings.
2. That Banks do not need our money.
3. That our savings are a liability to the banks.
4. That Banks lose money by paying us the pittance called interest on our savings.
So the BIG question is.
Q1. Why do Banks bother to encourage us to save our money with them ?
Wouldn’t they be earning a living on the fees and taking some of the interest the product is earning.
@@magravy1
What fees ?
Most people in the UK have a no charge zero interest account mainly for the convenience.
So are the Banks doing all this for nothing ?
Or is there something that we're not being told ?
@@dasdasdatics420
If a bank is offering savings products they charge a fee for this service or they can earn from the difference in interest from what they receive vs what we receive?
Offering current accounts at zero cost is a way to attract customers then you can sell them other products like mortgages and savings products?
This is not correct, he is being disingenuous, and he makes this clear towards the end of his statement, when he states that the banks need our money as a security on their loans, his analogy is not that clear, if they did not require our deposits they certainly would not pay interest on them, they would just continue to create money out of thin air
They don't require them. However if you make a deposit into a bank, bank reserves follow on the asset side. The bank gets 5% interest paid by the BoE for that. It's currently lucrative for the banks.
Good to know that Northern Rock did'nt really go bust because all the savers demanded their money back! Can't think why my NR shares went to zero value.
I find that I'm eagerly awaiting each episode of this series.
Richard tells you stuff you never learn at school or from the media"experts".
Does the same apply to the BoE , NS&I ? Didn't you do a video on how the money in NS&I or other gov't savings instruments and funds should be used to lend out for investment?
Government institution NS&i Treasury.
Richard:
1) a bank gives a loan of £1000 to a borrower
2) the borrower repays the £100 within 12 months
So we can see that overall no money has been created at all.
Your argument is false because you are only looking at a single point in time when a bank gives money to a borrower…..but the reality is a bank has continuous flows of money in and out all the time, so you can’t separate out a single transactional event and claim that’s the process.
I find these theoretical arguments hugely dishonest
If you really cared about an honest debate about MMT you would provide some formal modelling or peer reviewed study
What you say is true but it is only true for a narrow & unrealistic set of assumptions.
1) A zero % interest rate
2) Total bank lending does not grow over time.
Neither of these things have ever been true or commercial banks would never have made any money. Ever.
How much was total bank lending when you were born?
How much is it now?
How much will it be 10 years from now?
Less?
Zero chance.
A growing economy requires more money to denominate the growing amount of goods & services.
@@evildrome So what you are saying is the only money creation is the amount the bank total lending grows by.
Which disagrees with Richards claim that the bank creates money every time a loan is taken out.
@@RobinHarris-nf4yv The bank does create money every time it lends. But lenders do pay money back.
The *net* money supply growth is the balance between new loans & repayments.
Government money (the deficit) is also new money in the economy each year.
@@evildrome you are contradicting yourself, first you claim bank creates new money with every loan…then you go to explain that it’s only net money which is the amount created.
you can’t prove the bank creates new money everytime it lends….because money is flowing in and out constantly.
Net money supply growth is not the difference between new loans and repayments as the bank also makes profits on the interest spread
Banks also hold current accounts where money is deposited in bank but neither borrowed nor loaned.
@@RobinHarris-nf4yv Professor Richard Werner proved this concretely with his students in 2014. They got a bank to lend them €200,000 and they went down to the bank, looked over their shoulders, and documented the process. The experiment confirmed that when the bank granted the loan, it simply created a new deposit entry in the borrower's account without reducing any other accounts or reserves, ie. new money was created
Any savings you have should be in a locked box under your bed
It a bit different with trustee savings banks; which are basically loan-clubs.
Yes. Building Societies do lend actual depositors money.
Commercial banks stand guarantor for a debt you create for yourself.
When you sign the loan agreement, THAT is when the money (as debt) is created.
All the commercial bank does is guarantee your debt will be paid.
This is probably the most important discussion about banking ever held informally.
czcams.com/video/HLVHbY66ioA/video.html
They aren't totally unrelated, a bank must maintain liquidity and this is done by fractional reserve. That is a bank must hold a certain minimum percentage of funds it can loan. These funds are held separate from the transactional banking ledger in a slightly dubious process controlled by national banks.
What you say does not prove anything. Fractional reserve still has nothing to do with bank loans. It is simply a tiny safety belt in case more people will turn up and request their notes to be paid back by the bank. Still one has absolutely nothing to do with the other and is completely unrelated mate
In the UK, its not fractional reserve. Do you research first.
The UK operates a risk based capital requirements regime
The capital is invariably lent to the state and the state splashes that cash.
@@sebgierek1462 The UK doesn't have fractional reserve banking.
10%
So a Bank gets £100.
Lends out £1,000 of new money at 5%.
Getting £50.
Pays the depositor 4% = £4.
Profit £46.
Then the Government tops it up by 4% so £48.
The Magic Money Tree.
@@stephfoxwell4620 So a Bank gets £100.
Lends our £1,000 at 5%.
There's your starter problem. You've got the mechanism wrong.
So perhaps the only conclusion is that what people call money, the bank IOU notes, fiat, currency, bearer bonds is all fine until your own bank has a run or other event that makes them insolvent and need a bail out ( unlikey to happen again ) or a bail in , the present preferred model. Of course ultimately the BoE and Government may decide that notes or cash are not even useful and that all transactions need to be digital, complete with total control on how that functions and what you are allowed to do with your " money " Meanwhile as Richard points out, just read on your " notes " I promise to pay....and there is not much you can do to change that other than real money which most people have never seen or own and is even more complex to understand compared to potentially worthless bearer bonds.
The bank of england has been doing this for centuries. If you look at a bank note from 1720 it will say i promise to pay the bearer the sum of etc, or something like that
@@Mulberry2000 Back then, the bank note / promissory note/ bearer bond would be exchanged for gold on demand, however, notes today can only be exchanged for another note, although, it might be crisp and new, but still an IOU.
.@@remotesmaster2158 Notes issued in 1694 were an IOU/debt still you could get gold for it of course if you wanted. No point though as gold sovereigns were circulation as well.
Do you really think they have a pile of cash of depositors money, not lent out.
Banks have a constant stream of money flowing in and out, the fact that they create the money on the computer rather than check it against deposits is neither here nor there.
They don't need depositors money, but chequing balances are free costing credit to the bank, so it's financially beneficial to the bank.
Yes.
Do the math.
If you could create money, why would you lend depositors funds?
Banks take depositors money and they buy 3 to 7 year bonds.
They pay depositors a percentage of the interest they get on the bonds and pocket the rest.
They do not need depositors money and the income from arbitraging bonds is pure gravy.
@@evildrome Do the accounting.
Post the entries for the transactions involved.
@@adenwellsmith6908 Strangely, someone did it for us.
Bloke by the name of Prof Richard Werner.
He got permission from a German bank to snapshot their books before and after taking out a 200,000 Euro loan.
After forensic analysis of their accounts, guess what he found?
Have fun Googling it.
Richard if what you say is true, how come Northern Rock almost went bankrupt because people started withdrawing their money
I think you're confused. In this video, Richard is explaining that in 'modern' banking, saving and borrowing are independent of one another. Banks don't need savers to finance borrowers.
So, once you understand that, you can then just look at the savers 'bookkeeping' side. Northern Rock had a run because people had lost confidence in them (2008 crash), and decided to collect their money (debt/iou). Since, most of what they held was in fact 'electronic', they were unable to pay it out. Hence, potential bankruptcy, followed by government intervention.
@@JibbaJabber
Ah yes, the predictable MMTsplaining 🤣
You are using a false argument.
Just because banks just create the amount required for a loan rather than directly tag it to deposits does not mean banks don’t need savers to finance borrowers.
Banks need liquidity buffers to operate, so they can’t operate without savers.
Richard is trying to imply that banks simply create money, they don’t.
The reality is that the system is a continuous stream of money coming in and going out…..so you can’t prove whether the bank creates money for a loan as simultaneously money is coming in from loan payments
Try answering this:
Bank gives a customer £1000 loan
In 12 months Customer repays £1000 loan
So where is the money that is created after 12 months? - it doesn’t exist
Northern Rock were a Building Society.
Building Societies DO loan customer deposits.
Commercial banks do not.
@@RobinHarris-nf4yv
A) How do CC companies work? They have no depositors.
B) Total bank lending grows over time as a growing economy requires money to denominate increasing G&S. What was total bank lending 10 years ago? What is it now?
Wicksell 1907 "Economic Journal"
"The banks in their lending business are not only not limited by their own capital; they are not, at least not immediately, limited by any capital whatever; by concentrating in their hands almost all payments, they themselves create the money required..."
Banks are *CAPITAL* constrained and that is only due to regulation. Mechanically they require neither capital nor deposits.
"so you can’t prove whether the bank creates money for a loan as simultaneously money is coming in from loan payments"
You'd think.
Ever heard of Prof Richard Werner ?
He took out a 200,000 Euro loan with a German bank, snapshotted their accounts before & after the loan and then forensically analysed the accounts to prove that lending creates money.
Or just ask the BOE...
www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
Not almost. They went bankrupt
If this was true why did Northern Rock, a highly profitable bank, go bust
Richard won’t give an answer to that
They went bust because they had a run on their deposits. Banks have large differences between maturity profiles of their assets and liabilities. They also have around 3% equity with 97% liabilities and 100% assets.
The assets are the mortgages they extend, the cashflows from those mortgages are long duration, 5 year mortgages etc. However the liabilities can be short duration like on demand chequing accounts (personal saver deposits). Also from recollection Northern Rock was borrowing a lot of money in the money markets to fund the mortgages it had extended. The money market began to seize up as banks that lent other banks funds began to doubt whether they could be repaid.
So Northern Rock didn't have access to funds (I think the BOE then had to cover) and that got out, people lined up to get their cash out, and once that hit the media it was all over.
If Northern Rock through banking regulations had been forced to maturity match then it wouldn't have got into the predicament.
@@John-ou4rm In short it was using savers money (both retail and institutional) to make loans which is the direct opposite of what the video says.
@@Mike-lb1hx Sort of, let's say 10% of the liabilities the bank had were customer deposits, and the other 90% intra bank lending. The problem is they simply didn't have the customer cash to pay them out in a short time frame. So while there's not a one to one relationship of taking customer deposits and lending them out, they are utilised in the bigger pool. Customer deposits being paid 0% interest are free money to the banks who are lending mortgages at a higher rate.
Northern Rock was a Building Society.
Building Societies DO loan customer deposits.
Commercial banks do not.
One way AI could gain money is to make money by being a bank and generating it's own money.
Fractional lending??!!
Yup. Wake up & smell the scam.
I think you'd get a lot more professional credit if you put 'Prof' before your name and perhaps your highest qual after it, if it's a PhD. I listened to an earlier video of yours and thought "This is all very nice if you are a layman, but I want to listen to graduate level analysis... And who is this guy, some layman looking for an easy grift with a financial CZcams platform".
Anyway, will subscribe, hopefully you can discuss some leading edge views you have.
Imagine creating brand new money and then loaning it out (at no risk to you, cos you didn't earn it) at interest: That's bank lending
And then ,the Government giving you £3 billion a month for free!!
The banks move central bank money between each other, which only the central bank creates, always in exchange for assets. The assets are probably government bonds though. I think the relationship between government borrowing money creation is the interesting part.
@@metallitech Tier 1 capital (on the CET1 ratio) is made up of CB reserves, M1/cash, common stock, and BoE treasuries. CB reserves are created by the BoE, are backed by nothing, and then are used to buy real assets like cash, common stock and treasuries. Banks are essentially given free claims on real assets, and still need bailing out every 10 years or so:
1984: Johnson Matthey Bankers (JMB)
The Bank of England rescued JMB after it suffered large losses due to bad loans.
1991: Bank of Credit and Commerce International (BCCI)
While not a direct bailout, the Bank of England coordinated efforts to protect depositors after BCCI's collapse.
1995: Barings Bank
The Bank of England attempted to organize a bailout, but ultimately failed, leading to Barings' collapse.
2007-2009: Global Financial Crisis bailouts
Several major banks received government support during this period:
a. Northern Rock (2007)
b. Bradford & Bingley (2008)
c. Royal Bank of Scotland (RBS) Group (2008)
d. Lloyds TSB and HBOS (merged to form Lloyds Banking Group) (2008-2009)
2021: Greensill Capital
While not a direct bailout, the collapse of Greensill Capital led to discussions about potential government intervention to protect affected businesses.
@@BOZ_11 Central bank lending to commercial banks always has collateral.
@@metallitech It's circular, since CB reserves ARE collateral (amongst other securities/derivatives)