Jim, I LOVED this video b/c the subject matter is critical, the answer is surprising, and the video is short/clear. I sent along to my son and some friends.
For commercial banks, is the amount they can lend INDIRECTLY related to deposits? In other words, pretend bank one has $10 billion in deposits. Bank two has $1 billion in deposits. Per regulations, can they both press computer buttons to create the same amount of new money?
Hey Tom, thanks for the comment and thanks for forwarding!
As you can imagine, that short video is only "starter material" and there is much more to say, so I hope it induces people to read "Black Hole."
There is no direct mathematical relationship between the quantity of bank reserves (cash held by the bank) and the amount of deposits the banks can lend, or create. (Most people are unaware that the minimum required "reserve ratio" required by the Fed is, wait for it, zero! Just like the regulators of other major central banks.)
The short answer to your question is that there IS an indirect relationship between the quantity of bank reserves and their loan portfolio. Banks need to keep some deposits on hand because cash reserves and deposits move one-for-one between banks when payments are made. So keeping reserves depends on attracting deposits. Now, why do banks need a "prudent" level of reserves? Mainly to meet cash withdrawals when a depositor demands cash for his deposit. For example, if reserves were only one percent of deposits, I'd say that bank is playing with fire. If reserves were 30 percent of deposits and the bank was large with a stable deposit base, I'd say the bank was in good shape. But there is no "one-size-fits-all-banks" rule.
Post-GFC, the banking system operates with a high level of reserves compared to its history. But the reserves are mainly there for the bank to clear inter-bank payments and to provide for withdrawals, which are normal banking operations, but are separate from the deposit-creation (lending and investing) operation.
I wish I could write a shorter answer. At the end of Chapter Four of my book is a section called "How Markets Regulate Money Creation," which explains how a competitive market limits money creation. I recommend you check that out.
Finally, here is a quote from the Bank of England, which describes how bank reserve levels are normally determined. "In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of available reserves. As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set by the Bank of England. These lending decisions determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money [i.e., cash reserves] banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England."
Jim, I LOVED this video b/c the subject matter is critical, the answer is surprising, and the video is short/clear. I sent along to my son and some friends.
For commercial banks, is the amount they can lend INDIRECTLY related to deposits? In other words, pretend bank one has $10 billion in deposits. Bank two has $1 billion in deposits. Per regulations, can they both press computer buttons to create the same amount of new money?
Hey Tom, thanks for the comment and thanks for forwarding!
As you can imagine, that short video is only "starter material" and there is much more to say, so I hope it induces people to read "Black Hole."
There is no direct mathematical relationship between the quantity of bank reserves (cash held by the bank) and the amount of deposits the banks can lend, or create. (Most people are unaware that the minimum required "reserve ratio" required by the Fed is, wait for it, zero! Just like the regulators of other major central banks.)
The short answer to your question is that there IS an indirect relationship between the quantity of bank reserves and their loan portfolio. Banks need to keep some deposits on hand because cash reserves and deposits move one-for-one between banks when payments are made. So keeping reserves depends on attracting deposits. Now, why do banks need a "prudent" level of reserves? Mainly to meet cash withdrawals when a depositor demands cash for his deposit. For example, if reserves were only one percent of deposits, I'd say that bank is playing with fire. If reserves were 30 percent of deposits and the bank was large with a stable deposit base, I'd say the bank was in good shape. But there is no "one-size-fits-all-banks" rule.
Post-GFC, the banking system operates with a high level of reserves compared to its history. But the reserves are mainly there for the bank to clear inter-bank payments and to provide for withdrawals, which are normal banking operations, but are separate from the deposit-creation (lending and investing) operation.
I wish I could write a shorter answer. At the end of Chapter Four of my book is a section called "How Markets Regulate Money Creation," which explains how a competitive market limits money creation. I recommend you check that out.
Finally, here is a quote from the Bank of England, which describes how bank reserve levels are normally determined. "In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of available reserves. As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set by the Bank of England. These lending decisions determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money [i.e., cash reserves] banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England."
I have lots of other questions that spring off your reply, but let me first take a look at the book and see if it answers them already. Thank you!
Thanks Jim...
There is a reason none of this is taught in schools.
25+ years ago, someone I knew handed me a dvd of money masters, and my perspective on money was changed forever.
It's now free for anyone to watch on YouTube, and there really is no excuse in these times for anyone to be ignorant on the subject.
Could you share that Money Masters video? I'd love to review it. Thanks!
If you type in The Money Masters on YouTube search it comes back with many.
Here is both DVDs in full at this link.
https://youtu.be/AOk3wBuQNcE?si=T5oqEeYa_TeZoCwq
Thanks!