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by derriz
2823 days ago
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That statement is misleading or reflects a misunderstanding on the part of the author. "Credit" is an accounting concept. Balance sheets are accounting artifacts. The way the bank records it's transactions is a model, not reality. For example, lots of intangibles can have accounting entries created for them for various purposes, but these don't create reality. Btw, a big problem when discussing bank operations are that the terms "debit" and "credit" can be confusing as their roles are relative to the bank not the customer. Even "asset" and "liability" can be confusing. An Irish media finance and economics professor, Brian Lucey, mixed them up and suggested that a troubled bank could be fixed if it sold its deposits which is impossible - deposits are a liability for banks, not an asset. Reality is much more simple. Bank lending starts when a customer asks for a loan. Assuming the loan application meets all risk requirements, etc. AND sufficient funds (reserves) are available on the bank's balance sheet, the loan can be issued and the funds transfered to the customer. Reserves are reduced as part of this process but an asset is created for the bank (the loan) so the balance sheet remains the same size. |
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Well, that's the crux of it right there. You are disagreeing with several authoritative sources who say that no such transfer happens, and in general the loaned funds are created out of thin air.
Standard & Poor's: “Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit “creation” – credit is created literally out of thin air (or with the stroke of a keyboard)”
Group of 30: "... 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."
Richard Werner: "...each individual bank creates credit and money newly when granting a bank loan."
Banks are subject to constraints. They need to retain enough capital to absorb losses on their loan book, and they need to retain enough reserves to cover withdrawals and clearing requirements. They are free to create money "out of thin air" insofar as they meet regulatory requirements associated with those constraints. [1]
You wrote: "I've worked in retail banks and have some hands one (sic) grasp of their day to day operations."
I suggest that your experience does not encompass the whole sector, and that may be the source of your confusion.
[1] https://www.goodreads.com/book/show/13144133-where-does-mone...