So, how do banks go bust then?

Richard Murphy says:
April 19 2021 at 10:04 pm
Vince

Please read some MMT

No deposit has ever funded a loan in the near history of banking

You really do need to know how banking works before you comment on it here

It’s getting a bit boring that you keep posting misinformation

If you don’t need to attract deposits in order to fund lending then how can you ever have a bank run? How can a bank go bust?

Loans never require deposits

19 thoughts on “So, how do banks go bust then?”

  1. No, Tim, your previous post was misnamed: THIS is almost uniquely stupid even by Richard Murphy’s standards

  2. Dennis, Forever Tactful

    No deposit has ever funded a loan in the near history of banking

    He really does need to be tested.

  3. Not in any way an economics type person, but didn’t I read somewhere that ‘fractional reserve banking’ was based on banks getting a deposit, keeping a fraction of it (in reserve) and loaning out the rest?

  4. This is the key line:-
    “No deposit has ever funded a loan in the near history of banking”
    ‘NEAR HISTORY’. Which is truer but still not wholly true. So in a sense we already have MMT lite. And how’s that working out then?

  5. Does he mean the ‘recent’ history of banking – or is it a reference to the fact that what he has studied is ‘near history’ – an approximation of the actual study of past events which exists in his fevered imagination.

    He’s really hitting it out the park at the minute. Every post seems almost more insane than its predecessors. I agree with Dennis he needs to be tested.

    I hope he’s following the government advice to undergo two lateral flow tests per week, although even if he got COVID I’d still expect 8 to 12 posts per day

  6. I’m sure the next actual deposit in a bank doesn’t trigger a loan, once you’ve built up the fractional reserve there doesn’t need to be a tight correlation between loans and deposits. Only looking at marginal state and making assumptions about a process is as always a very bad way idea

  7. Deposits don’t create loans, this is true. However, if a bank makes a loan then it must fund it. By 4.30 that afternoon. Which means attracting the deposits – or capital – to fund it. There’s a whole department of every bank devoted to this, treasury. Back in the day the short term funding used to come from the overnight market. They attracted deposits from other banks by offering them an interest payment for doing so. Northern Rock went bust because it could not attract overnight deposits and the Bank of England wasn’t willing to step in to replace that.

    It is absolutely vital this link between loans and deposits. Entirely true that it’s loan first then deposit but it is still there. Today it’s largely swapping central bank reserves around between the different banks’ accounts. But that’s still attracting a deposit to fund a loan going out the door.

    P³ thinks that because a bank with more deposits doesn’t go make more loans then that’s that. But of course such a bank does – those deposits being made into other banks via the overnight market are loans coming out of the depositing bank. A rise in deposits does mean more loans that is. Just not more retail deposits meaning more retail loans at that one bank.

  8. I spent years in banking working on defeated leveraged leases – leases of assets mostly funded by loans funded by matching deposits from the lessee. The loan was only advanced and the asset purchased once the deposit had been placed.

  9. @Alex

    “No you didn’t, I don’t believe you ever worked there because your view contradicts mine and you seem to know more about the subject than me so you are an obvious troll and your time here is done.” (c) Spud Response

  10. Given the diverse areas of expertise of the Great Potato, I’m surprised he has not demanded to be made Manager of Spurs

  11. Dennis, This Week's Tottenham Manager

    Given the diverse areas of expertise of the Great Potato, I’m surprised he has not demanded to be made Manager of Spurs

    The Spurs would be too unimportant for Murphy. He probably wouldn’t settle for anything less than Liverpool or one of the Mans. Arsenal, maybe.

    Gee, Jose M. burns down another club. Now there’s a shocker. Only this time it wasn’t with the bit of winning on the front end. On a related note… Is there anyone in the world of soccer that Jose M. hasn’t insulted, offended, angered or annoyed? He’s the Euro version of Bill Belichick, but without Belichick’s charm.

  12. Given the diverse areas of expertise of the Great Potato, I’m surprised he has not demanded to be made Manager of Spurs

    The Arsenal supporters I know call them “the Spuds” so not that fanciful.

  13. If the bank doesn’t need deposits for loans – then what does he think the banks take deposits *for*?

    Its not out of the goodness of their hearts that they take my money, keep its safe, *and pay me for the privilege*.

    Like, does he know that banks and *central banks* are different things? Your state’s central bank can make money out of thin air – but your regular old bank can’t (at least not in places where they don’t let banks issue their own currency).

  14. Your state’s central bank can make money out of thin air – but your regular old bank can’t (at least not in places where they don’t let banks issue their own currency).

    Genuine question: does this make any significant difference to monetary theory (whether ‘modern’ or not?)

    I recall youthful trips to Italy in the 70s, where change was often given in 100 Lira notes (worth about a shilling) issued by a different local bank in each town (and often looked on sceptically in the neighbouring town). What about Scotland and Norn Iron?

  15. Scot and NI must deposit one for one with BoE. So, fully backed notes. The big test of local banking and local money creation was the US before the greenback in 1863 (3?). Wildly different values of different bank notes and always showing the pattern of lower the further. There’s vast amounts about this online. The UK, well, we didn’t quite so much have local banknote production as local banks were sorta, maybe, before bank notes themselves. What we did have was vast differences in the value of “notes”, letters of credit, I’ll give you my note drawn on x bank and so on. The discount applied to such notes was higher the greater the geography. Pretty mych the same thing, just we didn;t really have banknotes then.

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