[kgwgk]

You didn’t say

"if the banking system as a whole has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the system banking as a whole can make $10 million in loans" [and there will be in the end $11m in deposits in the banking system as a whole, offsetting the $1m in reserves and $10m in loans]

You said

"if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" [which is wrong unless you assume that every loan remains in that bank as a deposit so the “banking system as a whole” case is recovered]

Of course that bank could get more reserves to be able to make additional loans. But then it could lend much more than $10m if it gets enough deposits/reserves! [One bank =/= The banking system as a whole]

Edit: by the way, I’m curious what is the thing in my previous comment that you find “simply wrong”.

[louloulou]

I mean apologies if I'm misunderstanding what you're saying - but as far as I can tell you're claiming the leverage ratio for a bank is 0.9:1 and I'm saying it is 9:1. If that's the case only one of us can be correct.

It doesn't help that you're conflating the terms "deposits" and "reserves". Deposits are liabilities of the bank, while reserves are assets held in their account at the central bank.

If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1.

[Cats_In_Love]

https://www.investopedia.com/terms/r/requiredreserves.asp

"Reserve Requirement Example As an example, assume a bank had $200 million in deposits and is required to hold 10%. The bank is now allowed to lend out $180 million, which drastically increases bank credit. In addition to providing a buffer against bank runs and a layer of liquidity, reserve requirements are also used as a monetary tool by the Federal Reserve. By increasing the reserve requirement, the Federal Reserve is essentially taking money out of the money supply and increasing the cost of credit. Lowering the reserve requirement pumps money into the economy by giving banks excess reserves, which promotes the expansion of bank credit and lowers rates."

[kgwgk]

What I’m saying is that if you create a bank and I make a $1m deposit [0] your bank has

  Liabilities : deposit $1m
  Assets : reserves $1m

Now you can lend $900k to someone, who takes the money and tranfers it to someone else’s account in another bank to buy bitcoins or whatever. Your bank has now

  Liabilities : deposit $1m
  Assets : reserves $100k, loan $900k

And you cannot make more loans until you increase your reserves which means getting new deposits (so we’re no longer talking about a bank with $1m in deposits).

Say you get an additional million in deposits, your bank has now

  Liabilities : deposits $2m
  Assets : reserves $1.1m, loan $900k

And it could lend and additional $900k.

Alternatively, it could get funding from another source like borrowing from banks of issuing bonds. For example

  Liabilities : deposit $1m, bond $1m
  Assets : reserves $1.1m, loan $900k

I don’t think any of this is controversial, let alone wrong. By the way, for simplicity in those balanced sheets the “reserves” is all the funding available which has not been lent, not just the required reserves ($100k for $1m in deposits, etc.)

> If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1.

One of the main points of the paper under discussion is that this doesn’t happen. Reserves are not a binding constraint on lending.

[0] I don’t know if it makes much sense to talk about whether it is “actual cash”. Maybe my employer took a loan to pay me, maybe not. Maybe it was in cash, maybe by cheque, maybe by bank transfer. Would that change anything?

[louloulou]

That's no different than what I said, except you're conflating the ledger money created by banks with their reserves at the Central Bank.

Only Central Bank reserves and cash are considered "money" in this system. And I'm saying the "money" is leveraged 9:1 in our toy example, whereas you seem to be saying assets must always be greater than liabilities - which obviously I agree with. Since if they weren't, the bank would be insolvent.

[kgwgk]

You said

"if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans"

What I say is that it can only make more that $900k in loans _if_ the deposits held at the bank grow above $1m. Which doesn’t normally happen when lending because the most likely outcome is that the borrower takes the money out of the bank.

The reserves of the bank go down in that case, don’t you agree? They are just $100k after the $900k loan is made (and transferred away). $100k are the minimal reserves required when a bank has $1m in deposits.

Again, an individual bank is not the same as the banking system as a whole.

And I don’t quite get your remark about reserves. What I called “reserves” could be entirely held at the central bank (or in the vaults!) if the bank wanted to. Do you have an issue with those balance sheets?

[louloulou]

I shouldn't have quoted $1M in deposits, because I meant $1M in reserves. Since deposits can only become reserves if they are the liabilities of other banks that get settled by transferring reserves to your bank's reserve account.

My only point was individual banks, can lend up to whatever the reserve requirement is. If it was 10%, $1M in reserves at the central bank means the bank can could make $10M worth of loans. Do we disagree on this point?

It seems like we're arguing about what is actually money.

[kgwgk]

> My only point was individual banks, can lend up to whatever the reserve requirement is. If it was 10%, $1M in reserves at the central bank means the bank can could make $10M worth of loans. Do we disagree on this point?

I agree that bank can lend up to whatever the reserve requirement is. But the next sentence is extremely misleading at best.

For that bank with $1m in deposits and $1m in reserves before any lending that 10% requirement means that it can not let its reserves go below 100k (10% times $1m in deposits) so it can only lend up to $900k out.

I can agree if you say "the bank can make $9m worth of loans provided that the recipients of the loans never get them of the bank [and it ends with $10m in deposits]". That is reasonable (even approximatively true) for the banking system as a whole but is a ridiculous implicit assumption for an individual bank.

I would also agree if you said "a bank with $10m in deposits needs to have at least $1m in reserves".

[Cats_In_Love]

Referring to that 10% reserve requirement, understand that the is on DEPOSITs. The bank must retain 10% of it's deposits and can loan out 90% of it's deposits. When the bank makes a loan, that money becomes a deposit at another bank, for instance, the bank gives me a loan to purchase a car. That money goes to the person I have bought the car from and that person then deposits it in their bank. The bank they deposit it at could be the same bank I took my loan out from or it could be another bank. It depends on who I bought my car from. That deposit increases the total DEPOSITs at the bank where it is deposited. In the larger scheme of things, I am not the only person taking out loans and buying cars. So, in the greater scheme of things, while my borrowed money becomes a deposit in another bank, someone else borrowed money at another bank and deposited it at my bank. But a deposit is still a deposit, whether it is from a loan at the same bank or a loan from another bank. It doesn't matter. In theory, a bank could be getting all of the loans it makes back as deposits. That doesn't happen, though I question what happens when you buy a car from a Ford dealership and get a loan from Ford Financing. Regardless at no time has the bank ever made loans in excess of it's total deposits. The net result is that, through the magic of the money multiplier, because the banking systems deposits are increasing, iteratively, as loans become deposits, become loans, that 10% reserve requirement results in a money multiplier of 10. Every loan, because it is iteratively deposited back into the banking system, results in ten times as much money in deposits as there are in loans. So, lets see how that works. Bank 1 has $10 and loans out $9. (We will ignore where that initial $10 comes from for now). That $9 is deposited into bank 2 and now Bank 2 can loan out .9 * $9 or $8.10. That gets deposited into bank 3 that can now loan out .9*$8.1. If I remember my math from my economics studies, that becomes $100 in loans when all the bank loans are added up. $10 in an initial deposit becomes $100 in the money supply. But this does not mean that each individual bank is leveraged 9:1. No bank has loaned out 10 times it's deposits. It always has more deposits on account than it has outstanding loans. And keep in mind, it's loans are an asset. Deposits are a liability. Someone owes money to the bank when it makes a loan. The bank owes money to someone else, when they make a deposit. Because it has 10% of deposits on reserve, it always has 10% more assets than liabilities. Now, I don't know what you mean by "leveraged" 9:1, but if you mean that it has more liabilities than assets, this is not correct. If you are thinking that deposits are assets, then while I do get what you are thinking, they aren't. The deposits don't belong to the bank. It doesn't own that money. It has it on account, but it doesn't own it. Someone loans the bank money, the bank loans out the money it borrowed. It pays .01% on deposits, it charges 10% on it's loans.

Do, by all means, double check this. It's been quite a while since my studies so I had to work this out on the fly. I am generally more comfortable researching what I think I know then going over it again, and again, and again...... But I'm pretty sure that's right. It's in that deposits are liabilities and loans are assets things where, in working it through, I got that "oh!" moment.

It is an interesting thing, though. Because if you unwound all the deposits and all the loans in the economy, there would be no money in the money supply. All of it is dependent on loans and the money supply grows in response to the economy increasing. As the economy increases, there is a demand for more money. That demand results in more loans that results in an ever increasing supply of money.

It still weirds me out. But then, I do engineering, not money.