Skip to content

It’s just such a lovely claim

Money is Made by Lending, not Saving
We now know that all bank-made money is created by lending. As a result, we know that no bank lends savers’ funds. They are not the intermediaries that they were once supposed to be. The reality is that cash savings in banks are macro-economically inconsequential because they almost never create new employment or jobs in the way they are saved at present

Except the banks must balance their books at 4.30 pm every day.

What Capt Smash is doing is moving from the very particular to the general and missing the intermediate step which disproves.

It’s entirely true that a bank doesn’t wait for someone to deposit and then decide who to lend it to. They do indeed lend first. But that’s a very specific thing. At the end of the day – the banking day, that 16.30 hours – the bank must have balanced books. It must be true that capital plus deposits equals loans.

From Lloyds:

Look at how Total Assets equals Total Liabilities plus Total Equity.

Assets are (crudely) loans out, liabilities are deposits, capital is capital. And it’s the same for any other period we care to mention.

Loans equals deposits plus capital. Or, as we might say – ahaha – balance sheets balance. As an accountant would expect.

The way banking works is that this is true every day at that witching hour. Not just at the quarterly results date.

So, when a bank lends money it then looks around for who to borrow it from before 16.30 that day. That’s what the Treasury Department of a bank does. It funds the lending.

So, whatever the issue at the moment of lending at the end of the day – ahaha – banks do in fact lend out depositors’ money. It’s just they find the depositors after the lend.

At which point any grander theory built on the idea that banks don’t lend out deposits is the purest bullshit.

And the correct question to ask when someone asserts such a theory is – why do bank balance sheets always balance then?

35 thoughts on “It’s just such a lovely claim”

  1. Whenever a bank makes a loan (an asset in its books) , it simultaneously creates a matching deposit (a liability in its books) in the borrower’s bank account. Thus its accounts balance. In a double entry system every transaction etc gives rise to two entries so the accounts are always in balance whatever the time of day. If accounts don’t balance it is an indication something is wrong (eg incorrect record keeping etc).

  2. Hacket is correct.

    The best way to understand a bank is to run one. In the following simulation, click in the top right-hand corner on the button that says “Issue $25 Loan”. Note how the balance sheet expands with a matching deposit liability. Click the button again. Click on the other buttons also. Soon, you too will understand how banking works.

    How Loans Create Money

  3. “So why do banks pay interest on deposits if they don’t need them?”

    They want to retain deposits, not attract them. It’s a distinction with a difference. I learned that from Cullen Roche. Here are a couple of links where he discusses banking:

    The Basics of Banking

    Loans Create Deposits – In Context

    In the latter article, I see this sentence under a section titled: “‘Deposits Fund Loans’” (note the scare quotes on only that sub-title in the article but not on the other sub-titles in the article). Here is the sentence:

    “The birth of a demand deposit in particular is separate from retaining it through competition.”

    Cullen has discussed this point of retaining deposits elsewhere in more detail including at Seeking Alpha, but I can’t find that source right now. There may be other articles on his website also.

  4. It’s a distinction without a difference.

    So, OK, banks compete to retain deposits. Cool. Why do they?

    Well, if deposits plus capital don’t equal loans then we declare them to be bust, that’s why. So, whether they lend out deposits, or must go find deposits after making a loan, or they must compete to retain deposits after making a loan, makes no difference. The bank must compete with all other banks for the deposits which fund its loan book. Whatever mechanism we use in the middle we end up in the same place. The bank must have enough deposits to fund its loan book. Deposits fund loans. Do note that it’s entirely impossible to explain the (former, central bank reserves now largely achieve this) interbank and overnight markets without this. And they do (did) exist. So, therefore, it is true that deposits fund loans. QED.

  5. “As many of you know, I have spent much of the last seven years explaining to anyone who will listen that banks do not “lend out” deposits or reserves. Rather, they create both loan assets and matching deposit liabilities “from nothing” by means of double entry accounting entries. Creating money with a stroke of the pen (or a few taps on a computer keyboard) is what banks do.” —Frances Coppola

    Banks are NOT financial intermediaries. The idea that deposits are required for loans means that new deposits are required from the central bank for loans to be made which is the fallacy of fractional reserve banking and the myth of the money multiplier. Broad money drives base money and not the other way around. A quote from the second article that I linked to:

    The Money Multiplier Fable

    The money multiplier story – a fable really – claims that banks expand loans and deposits on the basis of a central bank function that gradually feeds reserves to banks, allowing them to expand their balance sheets with new loans and reservable deposits – according to reserve ratios that bind the pace of that expansion according to the reserves supplied. This is entirely wrong, of course. In fact, bank balance sheet expansion occurs largely through the endogenous process whereby loans create deposits. And central banks that impose reserve requirements provide the required reserve levels as a matter of automatic operational response – after the loan and deposit expansion that generates the requirement has occurred. The multiplier fable describes a central bank with direct exogenous control over bank expansion, based on a reserve supply function – which is a fiction. The facts of endogenous money creation have been demonstrated by empirical studies going back decades. Moreover, the facts are obvious to anybody who has actually been involved with or closely studied the actual reserve management operations of either a commercial bank or a central bank. In truth, no empirical ‘study’ is required – the banking world operates this way on a daily basis – and it is absurd that so many economics textbooks make up stories to the contrary. The truth of the ‘loans creates deposits’ meme is pretty well understood now – at least by those who take the time to learn the facts about it.”
    [end quote]

  6. Waving Frances at me doesn’t work. I know her, have discussed this with her and vehemently disagree with her opinion here. As she knows.

    Also, everything she’s said there is entirely irrelevant to my point. Loans are funded by deposits.

  7. Banks are capital-constrained, not reserve-constrained. As long as they can find credit-worthy customers, they can lend without regard to reserve positions. Note this Wikipedia article that has the banks waiting around for the central bank to give them money to lend:

    Money multiplier

    In monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money (also called the monetary base) under a fractional-reserve banking system. It relates to the maximum amount of commercial bank money that can be created, given a certain amount of central bank money. In a fractional-reserve banking system that has legal reserve requirements, the total amount of loans that commercial banks are allowed to extend (the commercial bank money that they can legally create) is equal to a multiple of the amount of reserves.
    [end quote]

    Later on in the same article, we have this, which is how it really works:

    Loans first model

    In the alternative model of money creation, loans are first extended by commercial banks – say, $1,000 of loans (following the example above), which may then require that the bank borrow $100 of reserves either from depositors (or other private sources of financing), or from the central bank. This view is advanced in endogenous money theories, such as the Post-Keynesian school of monetary circuit theory, as advanced by such economists as Basil Moore and Steve Keen.

    Finn E. Kydland and Edward C. Prescott argue that there is no evidence that either the monetary base or M1 leads the cycle.

    Jaromir Benes and Michael Kumhof of the IMF Research Department, argue that: the “deposit multiplier“ of the undergraduate economics textbook, where monetary aggregates are created at the initiative of the central bank, through an initial injection of high-powered money into the banking system that gets multiplied through bank lending, turns the actual operation of the monetary transmission mechanism on its head. At all times, when banks ask for reserves, the central bank obliges. According to this model, reserves therefore impose no constraint and the deposit multiplier is therefore a myth. The authors therefore argue that private banks are almost fully in control of the money creation process.

    John Whittaker of Lancaster University Management School, describes two systems used by the Bank of England. In both systems, the central bank supplies reserves to meet demand.
    [end quote]


  8. I’ve not said that banks are reserve constrained so your claim that they’re not is an irrelevance.

    And this is idiocy:

    “In the alternative model of money creation, loans are first extended by commercial banks – say, $1,000 of loans (following the example above), which may then require that the bank borrow $100 of reserves either from depositors (or other private sources of financing),”

    My claim is that deposits fund loans. So, in my model a bank lends out $1,000. OK. Then it must find $1,000 in deposits (or, of course, some lesser amount and then top up to the $1k with capital) to fund that loan. That’s all my claim is too. Agreed, it has many implications, but that is the claim. Banks must find the deposits to finance their loan book. That’s why the balance sheet balances in the way I point out it does. Deposits plus capital equal loans. They do at every reporting date too – one of those reporting dates being the balancing of the books at the end of every banking day.

    Do note something. Whether that deposit is the internal counterpart of the loan having been made, or whether it’s from some external to the bank source is entirely irrelevant to my claim. Deposits fund loans.

    Try sticking to that would you and stop trying to bring in irrelevances. Your doing so indicates you’re not grasping the subject at all.

  9. “My claim is that deposits fund loans. So, in my model a bank lends out $1,000. OK. Then it must find $1,000 in deposits”

    Nope, that’s the error right there. That $1,000 in deposits is right there on the liability side of the balance sheet, created as a balance sheet entry by the bank. The bank’s balance sheet expands as shown in the simulation in my first comment.

    Please excuse my simple examples as follows, but I’m trying to understand how you think a deposit can fund a loan, after the fact:

    If the bank actually had to find $1,000 in deposits, say by a customer walking into a bank and making a $1,000 cash deposit, the balance sheet would again expand by $1,000, i.e., both on the asset side and the liability side. That new deposit could NOT cover that loan because it’s already covering a claim on the asset side of the balance sheet, namely that cash that was deposited by the customer. The customer could of course come in the next day and withdraw that cash, then both sides of the balance sheet would contract by that $1,000, but the initial loan is still fully funded by the deposit that it itself created.

    If a customer walked into a branch and deposited a check instead from say their employer for $1,000, and assuming the employer had an account at the same branch, the bank would simply mark up the customer’s account by $1,000 and mark down the employer’s account by $1,000. No new net deposits are there at the bank, but simply a change of ownership of existing deposits. That deposit of the check could also not fund that loan, not that it needed to.

    If the employer was at a different branch, the banks settle in the overnight market to make things even up but there are no new deposits in the banking system as a whole.

    Just to be clear, if a customer walks into a bank and make a $1,000 cash deposit and another customer walks in and asks for a $1,000 loan, the bank’s balance sheet expands twice, once for each transaction and both times for $1,000. The two transactions simply do not mix. The order in which those transactions take place is irrelevant.

  10. If the employer was at a different branch, the banks settle in the overnight market to make things even up

    Quite, so, the bank must find the deposit to fund the loan. Why is this difficult for you?

  11. First, “different branch” should have been “different bank”.

    But again, no. I was simply making the point that when reserves move from the employer’s bank to the customer’s bank, those reserves are attached to the customer’s deposit, not the loan. It could have been a check for $1,200, or $800, or no check at all. The customer’s deposit balance went up, and the increase in reserves transferred from the other bank match that increase. It’s no different from if the customer had deposited cash instead.

    Let’s go back to when the loan was made. A loan was made for $1,000 which created a matching deposit liability on the right side of the balance sheet. Say that the person who has the loan is happy with the interest rate that they’re receiving on that deposit, and keep that deposit at that branch. That’s it, nothing else needs to happen. The bank needs not do anything else. It can earn that spread between the loan rate and the deposit rate.

    So now maybe the person who took out that loan pays a worker $100. The worker’s account is marked up by $100 and the person who took out the loan has their deposit marked down by $100. That person now has a deposit balance of $900. The outstanding loan of $1,000 is matched by the sum of the two deposits, i.e., $100 plus $900. The loan is the asset, and the two people are making claims on that loan from the liability side of the balance sheet, in the same way that the equity is making a claim from that same side of the balance sheet against the residual assets.

    Imagine that this is the only bank in a small town and everyone banks at the same bank. Note that you could start a bank with some equity capital, have businesses take out loans, which then create matching deposits, and use those deposits to run the economy. Apart from the initial equity deposit, no new deposits ever entered that bank. They were simply created within that bank, stayed there, and then the ownership claims shifted around.

    It’s even easier if you exclude cash. What is a check anyway? It’s an instruction to a bank that says mark up my deposit account and mark down someone else’s deposit account.

  12. You keep walking around the same circuit without addressing the question. Again, I am making a very simple claim. Deposits finance loans. That’s it. That’s all. If a bank does not have sufficient deposits plus capital to exactly match its loans then it is bust. That’s how the system works. Note, again, that’s all I’m claiming. We don’t need to follow a cheque around the system, don’t need any grand new theory about money creation. Deposits finance loans.

    It’s not about reserves either. Deposits finance loans.

  13. “My claim is that deposits fund loans. So, in my model a bank lends out $1,000. OK. Then it must find $1,000 in deposits”

    Recall that this is what we disagreed about. You were saying that the bank must find $1,000 in deposits, and I was saying that it needn’t find anything because it already had that $1,000 in deposits when it created the loan. Finding that $1,000 deposit is easy for the bank because it just finished creating it when it typed “$1,000” into a spreadsheet. To “find it” is to simply point at the spreadsheet.

    The deposit is the record that says this person owns that stuff over there on the asset side of the balance sheet. Because you added a $1,000 loan which is an asset to the bank, the bank gives you an ownership claim on its assets for $1,000.

    (As an aside, it’s 5:30 AM here in Canada, so I’m signing off for the night.)

  14. @ phoenix rising
    That only works if the borrower leaves every last cent in the bank account. Once he/she/they spends anything on the purpose of the loan your accounting identity ceases to apply.

  15. Dunno about you but when I borrow from a bank I do so to go spend it. Meaning it’s not, in fact, there in the bank any more……

  16. “Deposits finance loans.”

    Ah, you mean in the sense that a balance sheet must always balance, irrespective of how one arrives there (rather than as a process)? Well, yes, indeed…

  17. When I borrow from my bank it is *by* spending on my credit card (nearly everyone, except the market stalls which can’t, still seems to prefer “contactless”).
    That doesn’t fit phoenix rising’s theory of bank lending (but the balance sheet still balances because Lloyds has a creditor and an equal-and-opposite debtor).

  18. Even the BoE does not agree with you Tim. See Quarterly Bulletin 2014 Q1. This confirms what phoenix_rising has said and also goes through the various transactions step by step.

  19. I have indeed read that. And no, it doesn’t negate what I’m saying either. It is still true that banks must finance their loan book through a combination of deposits and capital. That the loans come first, worrying about the deposits second doesn’t change it either. Deposits finance loans.

  20. @Hacket – “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account.”

    That’s very much not true. The vast majority of loans that I have taken are by spending money using a credit card. In none of these cases did any money appear in any account of mine. Many people get mortgage loans for property. These do not result in any money appearing in any account of the borrower – the money is directly issued to a solicitor. People may also get loans to finance things like cars, fridges etc. Again, no money appears in any account of theirs when doing so – it always is transferred directly to the vendor.

    It is possible to get a loan where you are given the money into your account, but this is very much the exception. A search for “instant loan” reveals many companies offering such loans.

  21. TW: In your blog you said “ask why do bank balance sheets always balance then?” I and phoenix_rising have provided an explanation for this. Now you state “Deposits finance loans”. This is not the same as balancing the books. Who sets the requirement for deposits to finance loans and if it is not set by legislation etc by what mechanism is it effected?

  22. I have not previously in this thread (but often elsewhere) mentioned that many banks have deposits far in excess of loans to customers and only balance their books by making *deposits* at the BoE or other banks. Those deposits are not and cannot be deemed to be creatoed by lending except in the fevered imagination of Murphy or phoenix rising.
    For the benefit of phoenix rising I might mention that one of the things that annoyed me about the EU bureaucracy was that they called me a “Senior Expert” on banking which automatically devalued the title “Expert”

  23. “Now you state “Deposits finance loans”. This is not the same as balancing the books. ” Yes, it is. For one leads to the other. A bank makes a loan. So, it must find a matching deposit to finance that loan. Because the books must balance. Therefore deposits finance loans. QED.

  24. “Anyone can create money; the problem lies in getting it accepted” —Hyman Minsky

    I write an IOU, but no one wants to accept it. I notice that Tim Worstall has no problem getting his IOUs accepted on account of being a well-known blogger. So I go to Tim, and he helps me out by buying my IOU and giving me his IOU in exchange as payment, I spend his IOU, and it circulates in the economy as money. Tim charges me a fee for this.

    Tim, seeing a business opportunity here, hangs up a shingle offering to buy people’s IOUs in exchange for his. Tim soon has a box full of public IOUs which he now calls loans, and his IOUs circulate in the economy as money. Tim offers interest on his IOUs, so people can use them as savings also, but charges higher interest on the IOUs he buys. Tim is now in the spread business.

    Tim hears people complaining that they are worrying that their Tim Worstall IOUs might be lost or stolen. Tim offers to store their Tim Worstall IOUs with him. The public “deposits” those IOUs with Tim, and Tim charges them a monthly fee. Tim calls this a service charge.

    Tim finds that it’s much easier to just issue his new IOUs as deposits because people are going to deposit them with him anyway. People soon forget that deposits are actually IOUs. Tim is now storing the public IOUs and his IOUs. To save people time, he allows people to write slips to each other when they wish to swap his IOUs among each other. Tim calls this a checking account.

    Economists watching this are mystified because it seems that Tim is creating his IOUs out of thin air, “creatio ex nihilo”, so to speak. How can he possibly “fund/finance” these IOUs, they ask? Time passes and new economists figure out that Tim is simply swapping IOUs, which are now called loans and deposits. Tim actually just writes up his IOUs in the same way that they do when they write an IOU themselves.

    I have explained banking.


  25. Just for the sake of argument – and only that, not as a general principle, nor as something to be used as agreement on this or any other point – OK.

    Now introduce two things.

    1) Several banks

    2) An insistence that IOUs out and IOUs in must balance at specific points in time.

    For what you’ve described is a banking system, not a bank. And it is not true that as above, so below. Components of systems can indeed have wildly different behaviour from the system as a whole.

    Your description does not explain why – and this is just one example – a bank in a system with many banks has a Treasuty department. Whose job and function is to find deposits and so balance the books. If we are to explain the behaviour of a bank, rather than the banking system, then we must be able to explain that.

  26. “Whose job and function is to find deposits and so balance the books.”

    The books are always balanced. The problem is sometimes liquidity. A few selected quotes from Frances Coppola who gives a good explanation. (I especially like the first sentence below as regards capital because recall that banks are capital-constrained not reserve-constrained, so deposits don’t add to capital. Also, she reminds us in that last paragraph that banks don’t need to find deposits because they can create their own, again, in the act of lending):

    “Contrary to popular opinion, banks can’t increase their capital by attracting more retail deposits. Deposits are the bank’s liabilities, not its capital.

    Banks need liquidity. They can indeed run out of money, and nearly did in 2008. But it is not lending per se that makes them run out of money. It is deposit withdrawals.

    Deposit withdrawals are always a risk for a bank. Banks are illiquid by nature – they typically have large numbers of long-term loans on the asset side of their balance sheet, while deposits may be withdrawable on demand. They don’t keep much in the way of cash lying around, since they assume that only a small proportion of customers will want to withdraw funds on any given day. Banks do forecast expected deposit withdrawals, and position cash funding in advance to meet them: but if on any given day a bank lacks sufficient physical cash to meet unexpected customer demand, it must borrow from other banks or from the central bank. Similarly, if a bank lacks sufficient electronic reserves at the central bank to make payments out of customer deposit accounts when requested, it must borrow them from other banks or from the central bank.

    Banks create deposits when they lend, and those deposits are generally drawn soon after the loan is agreed. Banks need to ensure they have sufficient cash (currency or reserves) to fund the drawdown of loan deposits, just as they must ensure they have sufficient cash to fund the drawdown of any other deposit. It is a fallacy of composition to say that banks need to “fund lending.” They don’t. They need to fund deposit drawdown, including – but not limited to – the deposits created in the course of lending. Economists, please note.”
    [end quote]

    As an aside, I have an article saved that isn’t relevant to this discussion, but it describes what happens when transactions take place within a bank versus between different banks and how the banks settle up between each other. It has some nice charts. Here is the link:

    [A simple explanation of how money moves around the banking system]

  27. As this article shows, attracting too many deposits chokes off a bank’s ability to make loans.

    Banks are so strange. You might think that the way a bank would work would be that, the more money it has, the more money it can use to make loans and trade securities. If people flock to a bank to give it deposits, then it will have more money to lend. Or if a bank makes savvy interest-rate derivatives bets, and those bets pay off, then it will have more money that it can use to buy stocks and bonds. That is how businesses tend to work: If they do stuff that brings in money then they can use the money to do more stuff.

    Still this is a real thing! We talked about a related story back in April: As markets seized up, people did flock to banks to give them deposits (because cash in the bank seemed safer than the alternatives), and the banks took the deposits, and then the banks might have had to cut back on activity because, paradoxically, they had too much money. The Federal Reserve went and changed its regulations so that the inflow of deposits wouldn’t choke off lending.

    Really, that says: Banks have gotten so many new deposits that they can’t lend money anymore, so we are going to change the rules to let them lend money even though they have lots of deposits. That’s not how people normally think about banking! George Bailey didn’t have to call in loans because people kept putting money in his bank! Quite the opposite! But the way modern banking works is, sometimes, that the more deposits banks get, the less they can lend.

    (Oh, fine. The simplest quasi-technical explanation is that people don’t really give banks money, they lend banks money. Deposits are liabilities of the bank, and even interest-rate-derivatives collateral is in a sense only temporarily in the banks’ custody. Banks can borrow a lot of money without meaning to, as it were; people can show up at a bank and deposit money in a way that they couldn’t show up at your house and lend you money. The principal constraint on modern banks is the leverage ratio: Basically, regulators do not want banks to borrow too much, because there is a history of borrowing too much being bad for banks, so there is a rule limiting how much borrowed money they can have for every dollar of shareholders’ equity. So when banks unexpectedly borrow a whole lot—because people rush to the banks to lend them money—they run up against that limit and have to cut back on their activities, or at least not expand them, to stay within the rules. The change that the Fed announced in April—there was an additional adjustment last week—was essentially that if people give a bank a ton of money and the bank parks it in Treasury bonds and Fed reserve accounts, the Fed won’t count that against the bank’s borrowing limits, so it doesn’t have to restrict the rest of its business.)
    [end quote]

    [Too Much Money Can Be Bad for Banks]

  28. Another article from the same author with a quote:

    A weird problem with that is that it limits your ability to take deposits: If people come to you with money, you can’t take their money—even to park it in super-safe Fed reserves—because doing so will gross up your balance sheet and force you to raise more equity capital. In normal times this is not a big deal; you just sort of figure out what the needs of your business are and optimize your capital around it. But if people are suddenly flocking to you to give you deposits to invest in super-safe reserves, because any assets riskier than cash make people nervous, then you will have a problem. You might not be able to take their deposits without raising more equity, which might be hard in a crisis. You will have to turn them away: “I have no more room for deposits,” you’ll have to tell them. 

    Usually the way we think of financial crises is that people run to banks to take out their deposits, not to put in more, but I guess this is kind of a weird financial crisis.
    [end quote]

    [Banks Have Too Much Money Now]

  29. “Banks need liquidity. They can indeed run out of money, and nearly did in 2008. But it is not lending per se that makes them run out of money. It is deposit withdrawals.”

    So, why is this a problem?

    “but if on any given day a bank lacks sufficient physical cash to meet unexpected customer demand, it must borrow from other banks or from the central bank.”

    Why do they do this?

    “Banks need to ensure they have sufficient cash (currency or reserves) to fund the drawdown of loan deposits,”


    ” It is a fallacy of composition to say that banks need to “fund lending.” They don’t. They need to fund deposit drawdown, including – but not limited to – the deposits created in the course of lending. Economists, please note.””

    Indeed, the reason they have to do all of this is because deposits fund loans. Note what Frances says. If a bank doesn’t have the deposits to fund its loan book then it must go out and find those deposits. So as to fund its loan book. Which is where I came in, isn’t it. With that we can now explain banking. Why banks do offer interest on deposits. Why banks compete with each other for deposits (those two are broadly the same thing).

    Saying that this is only true of – that banks only have to fund – “deposit drawdown” doesn’t change anything. Beause, of course – as Northern Rock and innumerable banks before found out – every deposit is potentially drawdownable. And therefore we come back to the starting point. Deposits fund loans. For if a bank doesn’t have the deposits to fund its loan book it is bust. QED.

  30. “If a bank doesn’t have the deposits to fund its loan book then it must go out and find those deposits.”

    Fallacy of composition. If a bank took a deposit from another bank, and by your logic, then the other bank is short that deposit.

    It’s turtles all the way down.

  31. Banks work on the 3-6-3 rule. Pay 3% on deposits, earn 6% on loans, and be on the golf course by 3.

    When a bank makes a loan, it creates a matching deposit. It earns that 3% spread. The bank’s balance sheet expands and reduces the bank’s ability to make loans by the amount of that loan.

    When a bank attracts a deposit, that deposit adds reserves. So now it’s paying 3% on that deposit and earning nothing on those reserves. The bank is making negative spread on that transaction. Not only that, its balance sheet expands by those reserves, which means its ability to make loans is reduced by that deposit.

    The first kind of deposit is of the good kind, the latter is of the bad kind.

    Banks want to fill up the asset side of their balance sheet with loans, not reserves. It needs some reserves for settlement, but not too much. That was the problem with QE and the excess reserves it created which the banks in aggregate could not get rid of.

  32. No, other way around. The banking system as a whole does indeed largely work the way MMT says. But individual banks do not.

    So, for example, overnight lending. Everyone tots up their books at 1600 hours. Lloyds has lent out a little more than was deposited with it. Nat West has had deposits of a little more than its change in lending. But the books of both banks must balance. So, Lloyds borrows some from Nat West. That’s a loan out to NatWest, a deposit to Lloyds. This all happens and at 1630 precisely all bank books balance. Then off we go for another trip around the houses.

    The fallacy of composition is to think that because the *banking system* larlgey works as MMT (or I’ll at least not argue with insistence that it does) says that therefore *individual banks* work that way. They don’t. For an individual bank deposits fund loans. Which is why there’s that competition to not lose deposits which you’ve already mentioned. And, yes, Lloyds will go out looking for the suplus deposits elsewhere in the system – and pay good interest on them too.

Leave a Reply

Your email address will not be published. Required fields are marked *