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For the MMT folk

So, from Lloyds Bank:

If banks just create their own deposits as a part of the act of lending then why does Lloyds go to all this trouble to go borrow from the wider markets? In the tens of £billions?

Note that if your description of banking doesn’t describe how banking is done then, well, it’s not describing banking, is it?

14 thoughts on “For the MMT folk”

  1. Believing in Lefty ideas requires belief in 91,003,271, 720, 463 contradicting ideas at once, so thinking becomes more like playing neural pinball. Easy to get a bit confused when trying to work with reality.

  2. Deposits are not secure liabilities whereas assets are. Therefore the deposit liability can crystallise when you take you cash elsewhere or to spend it. Not being able to meet liabilities = insolvency. So best not rely on deposit liabilities alone then.

    Simple. See Net Stable Funding Ratio and similar

  3. Assets are “secure” in that they don’t move which can leave a bank with a maturity mismatch. Sorry. Not clear in original.

  4. From a 2015 article titled: “Deposit Wars”

    At the same time large banks, prodded by newly imposed liquidity ratios, have been aggressively gathering deposits. Whether this behavior was prescient, or just the result of being beaten like a dog, large banks have been successful in the deposit war. Given that deposit customers may be just as likely in the virtual world to be very sticky customers, deposit victories today might last decades.
    [end quote]


    The first reason given above is referring to liquidity, not making loans. The second reason is the same reason banks used to give out free toasters to new clients. They’re willing to take a loss on a deposit because that new customer would be a potential client to whom they could make loans.

  5. I did a Google search on Lloyds and I got this from a 2011 article:

    Increasing deposits would help to ease funding concerns for bidders by narrowing the gap between mortgages and savings. The business Lloyds is selling has about £30bn more loans than deposits, although the mortgage book is expected to shrink as customers make repayments.

    Northern Rock is in a different position from Lloyds and other banks as it has an unusually low loan-to-deposit ratio and this excess liquidity weighs on its profit margin.

    The bank wants to shed customer deposits to improve the returns a prospective buyer could make on the assets.
    [end quote]

    In both cases, it’s about liquidity.

    As an aside, how did Northern Rock end up with so many deposits. A Google search has this:

    “Brits run to ‘guaranteed’ banks

    Mike Bellhouse lined up Thursday to open an account at Northern Rock. The bank failed last year, but the government took it over and fully guarantees customers’ deposits.”

    “The Chancellor, Alastair Darling, ended up guaranteeing all of Northern Rock’s deposits, rather than just the first £34,000 of each customer’s money that would have been protected under current law. He claimed to have little choice in the matter: the run on Northern Rock could have infected other banks and threatened the entire financial system.”
    [end quote]

    In this case it was the safety guarantee that attracted deposits and as you can see from the previous quote, Northern Rock didn’t want those deposits which is why it was trying to shed them.

  6. “Why not try to answer the question posed rather than do Google searches?”

    There are things specific to certain banks, which is why a Google search is helpful. You were trying to generalize from the actions of a single bank. I could have just as easily said that Northern Rock was trying to shed deposits which proves the case that banks want to get rid of deposits, which of course isn’t true.

    As an aside, I have over thirty years experience analyzing corporations including banks for a living. Reading an annual report and doing a complete analysis takes a few days, though the analysis gets easier if I’ve followed a corporation over a number of years because then I’m just noting the changes that took place over time.

    A Google search is quicker because some other analyst has done the research and answered the questions already.

  7. But you’re not answering the question. If deposits do not finance loans at the level of an individual bank then – and therefore – there’s no reason for a bank to be paying interest on deposits. They do – so, why do they? Because deposits finance loans – QED

  8. “Because deposits finance loans”

    Actually, loans finance deposits. So anyway, me with the Google search thing…I Google the phrase “loans finance deposits” and lo and behold, out of only 12 hits on Google, one of them is an article from you in Forbes. First, here is the quote of what you wrote:

    The actual process was the series of bank runs that happened through the early 1930s. The problem is that in a fractional reserve banking system banks are inherently unstable. The fractional refers to the fact that when you deposit $100 with one they don’t then keep that $100 in the safe. They take a guess at how much they need in the safe (OK, it’s an informed guess, but it is a guess) for when people turn up demanding their cash and the rest of it they lend out to other people. This is how companies, mortgages and business loans are financed (please, we don’t need to go into “but loans finance deposits” and all that: it might even be true but it’s irrelevant here).
    [end quote]


    To be fair, the article is from 2013, but I see you were doing the fractional reserve banking thing back then, which is a complete fallacy. In the bank simulation I gave a link to earlier, you could clearly see that when a loan was issued, a new deposit was created that added on to the existing deposits.

    A deposit coming into a bank adds reserves, and banks do not and cannot lend out reserves.

    As to why banks pay interest on deposits, it’s because banks are price takers in both the deposit and the loan markets. They need to pay a competitive rate of interest on deposits to retain them, lest they lose reserves, which causes liquidity problems. A deposit can leave a bank and the loan that created that deposit stays right there on the books.

    As an aside, if banks needed deposits to make loans, how could the banking system grow over time, which we know it does? There have to be new deposits. Where would they come from?

  9. I see. I announce that the idea is irrelevant to the point being made and you then go on to assume that this means I agree with that idea?

    Well done. Vry well done that man.

    ” A deposit can leave a bank and the loan that created that deposit stays right there on the books.”

    If so, that means that the bank doesn’t have sufficient deposits to finance its loan book and it is therefore bankrupt. Therefore deposits finance loans. What is it about this that you’re not grasping?

  10. I asked you how deposits grow in the banking system. If your understanding of banking is correct, you should be able to answer that.

  11. I asked you where broad money comes from, and you give me a chart showing broad money. You haven’t answered the question.

    You need to explain where the broad money comes from.

    As an aside, I’m sorry if my previous comment offended you. I myself learned fractional reserve money, money multipliers, etc., and then ended up throwing it all away. I even learned what I thought was Keynesian economics, but then found out later that what I had actually learned was a bastardized form of Keynesianism called New Keynesianism. Then I learned Post Keynesianism, which is what Keynes really taught, which is how I ended up in MMT.

  12. Again, to repeat – I’m not very interested in these wider questions. What I want is to concentrate upon the one little specific here. Do deposits finance loans or not? I say yes.

    I’ve even, already, pointed out that we’ve got to consider the fallacy of composition. Sure, it’s true that wide money supply is at least partially created by the banks extending credit to people. But that’s “the banks”, the system as a whole. I want to concentrate on this one little bit of the discussion. As I’ve said several times now. At the level of the individual bank, do deposits finance loans or not? Yes, they do, banks act as if they do too.

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