[rfjakob]

I'm not really sure what you mean. The Bank of England article you linked says:

> that would leave the buyer’s bank with fewer reserves and more loans relative to its deposits than before. [...] > By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2.

So actually the banks need deposits to hand out loans. What you are saying is that the deposits get a new label before handing them out as loans?

[soVeryTired]

> So actually the banks need deposits to hand out loans. What you are saying is that the deposits get a new label before handing them out as loans?

Well, no. What the BoE paper is saying is this: Suppose there are two banks, A and B.

If Bank A went on a lending spree without attracting new deposits (or otherwise bringing in new reserves), many of the deposits it created would end up with bank B, because bank A has no control over how its deposits are used. Bank A would have to transfer reserves to bank B to settle the transactions. Eventually bank A would run low on reserves and would need to raise more (by issuing debt, or by making its deposit rate more attractive).

But if bank B was going on a similar lending spree at the same time, the two banks wouldn't run down each others's reserves. If the two banks act in tandem (e.g. by getting caught up in speculative mortgage lending), they can create plenty of money without needing to attract new deposits.

The biggest regulatory hurdle that stops this happening is that there's a regulatory constraint on the leverage ratio (assets - liabilities) / assets.

[stephen_g]

Banks need the liquidity from various sources (including deposits) because they lend, not to lend.

On the bank's balance sheet, they cannot take deposits and lend them out.

[dunkelheit]

Ugh. It is a bit like saying that people don't earn money to buy things, but earn money because they buy things! By this line of reasoning when I go to a store, I am totally unconstrained by how much I earn - I just take my credit card, swipe it and buy whatever I want. Now, this strategy would be unsustainable in the long run if not backed by sufficient inflow of cash from my employer. So I have to work every day. But these are totally separate processes!

A lot of bookkeeping gets done, assets and liabilities change hands, but in the end it can still be described simply as "people earn money and buy things with it."

[plankers]

Maybe it's just me but this really seems like quibbling over semantics. Cash is fungible: banks need cash in order to lend it out and they get cash from deposits. The rest is just bookkeeping.

[Timmah]

There's clearly not enough in deposit to sustain this model. In the US, a large majority of people don't have enough saved to last 3 months.

[pas]

banks need deposits to keep their leverage ratio in check.

and due to overleveraging one unit of deposit ends up as multiple units of loans.

and sure, deposits are not the main factor for lending, risk is. but usually taking deposits is cheaper than taking out a loan from an institution and lending that out. hence banks want/need deposits.

[derriz]

Of course they do. That's what fractional reserve banking is all about. Banks borrow money (e.g. from depositors, on the money markets, from other banks) and lend out the money they raise while keeping a "reserve".

A typical bank's balance sheet will contain deposits on one side and loans on the other. Without deposits, or other sources of borrowing, a bank cannot lend money.

[stephen_g]

Again, that’s just a popular misconception. The document I linked to before from the Bank of England [1] is all about how what you describe, while commonly believed, is not how modern, real world banks work.

1. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

[derriz]

The document you linked does not contradict my claim. Your document describes the role of banks in the M2 money supply NOT how individual banks work.

I can assure you that what I describe IS how real world banks work. You can look at the balance sheet of any retail bank and it will spell this out clearly. I've worked in retail banks and have some hands one grasp of their day to day operations.

Your confusion is a common one - you mistake the process that results in the creation of M2 money with the day-to-day operations of retail banking.

Modern retail banking is a very simple business - they borrow funds (from depositors, other banks, sometimes central banks, commercial loans, etc.) and then lend out the SAME funds while keeping some back in liquid assets (cash, deposits in central banks, short term government notes, etc.) in reserve. The trick is to charge more interest on what you lend out than you pay on what you borrow while managing the risk and cash flows involved when you have a mixture of terms (expiries) of borrowings and lendings.

I think I've given a reasonable summary in my posts of how banks work. I've studied the balance sheets of retail banks and have been exposed to their day to day operations so please don't simply disagree with me and point me to a document on M2 money creation - if you think I've stated something untrue, then highlight it and describe where I'm wrong.

[mendelsd]

Banks are not merely intermediaries between savers and borrowers. Loans create money, but only loans that are not used to repay other loans result in an increase to the money supply. The following text comes from an ING Bank research note, quoted by The Economist [1]:

"Banks do not view the creation of money as an objective itself. It is a by-product of the banking sector’s business operations. However, it is of great economic and social relevance.

Not every loan ultimately results in new money. The majority of new lending is used to redeem existing loans. Money is only created to the extent the gross lending exceeds the value of the existing loans being redeemed."

That note refers to the "great economic and social relevance" of these banking operations. Here's Professor Richard Werner talking about this at length. [2]

Here's Perry Mehrling (who teaches Coursera's Economics of Money and Banking) weighing in [3]. He explains that it's a nuanced issue but clearly agrees that the "credit creation view" is important and quotes a Group of 30 report:

“In a barter economy, there can rarely be investment without prior saving. However, in a world where a private bank’s liabilities are widely accepted as a medium of exchange, banks can and do create both credit and money. They do this by making loans, or purchasing some other asset, and simply writing up both sides of their balance sheet.”

[1] https://www.economist.com/buttonwoods-notebook/2014/06/11/wh...

[2] https://www.youtube.com/watch?v=N-FDdHj7rPk

[3] http://www.perrymehrling.com/2016/01/great-and-mighty-things...

[derriz]

Again banks' role in the creation of M2 money does not reflect how individual retail banks operate.

Just because you have a model that seems to describes the behavior of flock of birds doesn't mean that the model is useful when discussing the anatomy and wing-aerodynamics of individual birds.

You've posted a bunch of links describing the various forms of money and the role of banks in modern (post 18th century) M2 money creation. I know all of this material but it's not relevant to the operations of individual retail banks.

[rfjakob]

Don't banks take deposits because they want to lend?

[stephen_g]

Sure, it's fairly cheap liquidity, the more the better. But no bank ever stops lending because they don't "have enough" deposits, because there is nothing of the mechanics of lending that relies on having existing deposits.

They just need to be 1) solvent and 2) within their capital adequacy requirements and leverage ratios.