[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".

[ubercow13]

>the bank can make $9m worth of loans provided that the recipients of the loans never get them of the bank

The bank can make $9m worth of loans (actually the bank can make any amount of loans, maybe even more), and some proportion of that may be transferred to other banks as reserves, and some other reserves will be transferred onto the banks balance sheet from unrelated transactions the bank makes. Then at the end of the day if the bank needs more reserves, it borrows them. The likely amount the bank needs to borrow based on the loans it makes and the cost of that reserve borrowing determines how many loans it will make. If it wouldn’t be profitable to make more, it’ll stop.

At no point does the bank only make 900k of loans so that it is fully covered in case all its loans are transferred out. The whole thesis of the paper is that that way of thinking is backwards.

[kgwgk]

Then you could just as well say that it can make $9m in loans, $99m in loans or $999m in loans as long as enough reserves are transferred onto the banks balance sheet from unrelated transactions the bank makes (including borrowing if required).

The amount of reserves can (and will) go up and down for an individual bank as it operates depending on their strategy.

10x the initial reserves has no particular meaning for an individual bank, only for the whole system (and the whole thesis of the paper is that even then the 10x number doesn't really matter).

[ubercow13]

Yes, couldn’t you say that?

To go back to your previous point

> 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

This just doesn’t make any sense. The whole point of the reserve requirement is to guard against the risk that depositors will withdraw enough money at once to deplete the reserves. The bank needs to meet the reserve requirement of deposits on its balance sheet, not a theoretical future balance sheet. You’re explaining it as if the reserve requirement applies after the theoretical worst possible bank run occurs.

Say the debtor moves all their money to another bank as per your example. Now the bank has 1m deposits and 100k reserves. Now those other depositors also move 100k to another bank, so the bank has no reserves. Uh oh - making that 900k loan actually allowed the banks reserves to drop below the requirement in this theoretical eventuality!

Does that mean the bank shouldn’t have made the loan? No, because the reserve requirement applies to their current balance sheet. When the bank had 1m deposits and 1m reserves, it could make 9m loans. At this point it has 10% reserved (designed to guard against the eventuality that those debtors all withdraw their money). If the bank makes 900k loans and they are withdrawn, it has 1m deposits and 0.1m reserves. It is now in exactly the same situation as the previous example (scaled down). The bank doesn’t need to wait for this unlikely event to happen to allow its reserves to drop to 10%, it can just make the extra loans in the first place.

[kgwgk]

>> 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

> This just doesn’t make any sense. The whole point of the reserve requirement is to guard against the risk that depositors will withdraw enough money at once to deplete the reserves. The bank needs to meet the reserve requirement of deposits on its balance sheet, not a theoretical future balance sheet.

What part doesn't make sense precisely?

A) The bank has $1m in deposits

B) It has to meet the reserve requirement (10%) for the deposits in its balance sheet ($1m)

C) The reserve requirement is $100k

D) The rest are excess reserves

The balance sheet looks like this:

    Assets                      Liabilities
    $100k Required reserves     $1m Deposits
    $900k Excess reserves

> Say the debtor moves all their money to another bank as per your example. Now the bank has 1m deposits and 100k reserves.

Sure, this is the balance sheet now:

    Assets                      Liabilities
    $100k Required reserves     $1m Deposits
    $900k Loans

> Now those other depositors also move 100k to another bank, so the bank has no reserves. Uh oh - making that 900k loan actually allowed the banks reserves to drop below the requirement in this theoretical eventuality!

That's the whole point of fractional reserve! You have enough reserves to cover a fraction of the deposits amount. If the bank has no excess reserves it will be in breach as soon as some depositor decides to get some of their money back and it will need to get more reserves to remain in compliance.

> The bank doesn’t need to wait for this unlikely event to happen to allow its reserves to drop to 10%, it can just make the extra loans in the first place.

The unlikely event that the people who take loans sends the money elsewhere? What would be unlikely is that they didn't.

[kgwgk]

> couldn’t you say that?

Ok, then this is NOT how it works -> "if a bank has $1 million in deposits the bank can make $10 million in loans"

I can agree with either of the following formulations:

"if a bank has $1 million in deposits the bank can make $10 million in loans as long as the loans remain as deposits in the bank"

"if a bank has $1 million in deposits the bank can make loans for any amount that it wants as long is it can comply with the reserve requirements"