[retube]

This is a very misunderstood article. The money they "create", i.e loaned or paid out, has to be funded by a deposit or similar borrowing. Making sure they can fund all their commitments is what liquidity managers and treasury departments do, it's why regulators subject banks to annual ILAAPs (Internal Liquidity Adequacy Assessment Process), it's why banks have liquidity risk and modelling teams to manage any "gap" risk banks are running in this respect.

If banks could simply create money then they'd never go bust. The only exception is the Central Bank, which can create new money that is it uses to buy assets of the same value, supporting prices and improving liquidity in the financial system.

[mason55]

This is also the root of the overnight repo market that everyone was up in arms about awhile ago.

The bank originates a new loan that they think will be profitable. Then they need to come up with the assets to offset that loan on their balance sheet (or at least a small percentage of it).

From a macro perspective you'd expect some banks to have more assets than they need and some to have less (because if I loan Joe money then eventually it will end up back in a bank somewhere, or at least a percentage of it). Each night the banks that need assets borrow from the banks that have assets and pay a small fee.

[syndacks]

https://en.m.wikipedia.org/wiki/Fractional-reserve_banking

Banks do create money, by loaining other people's. I think you're saying the same thing?

[stu2b50]

That's what he's saying. They do create money effectively by loaning out deposits, but that's far from literally creating money.

If they have a deficit on their sheets they can't just create money for themselves like a central bank could.

[mason55]

> They do create money effectively by loaning out deposits

That's what we're taught in school but it's really backwards. They make loans that they think will be profitable and then figure out how to get the reserves needed to cover the balance sheet (either through issuing equity, drumming up more deposits, or borrowing in the overnight repo market).

https://www.investopedia.com/articles/investing/022416/why-b...

A good phrase to search for to learn more is "loans create deposits"

[stu2b50]

Sure, their assets are somewhat fungible in both time and space so long as they meet liquidity regulations.

Regardless, the point is that they can't poof money for themselves like the Fed, or another central bank, can. They can increase the economy's supply of money effectively, but that is different from having direct power over monetary supply.