Recession predictions

Timing belt wrote: »

What you have just quoted confirms that a bank lends based on it's customer deposits. A bank first decides how much to lend based on profitability, lending opportunities and risk appetite. The bank will then offer a better deposit rate to attract deposits to fund this lending (Assuming it is not availing of TILRO or some other source of funding) This is why Irish banks source of funding is 80%+ customer deposits.

As for a central bank never refusing to shore up a banks reserves this is also false. Unless the bank is a G-SIB the central bank will let the bank fail and this is why they have issued banking resolution regulations which require banks to have process in place for such and event and require them to issue MREL which in the event of resolution will recapitalise the bank to allow to be wound down in an orderly fashion.

The only banks that central banks would not allow fail are G-SIB's and because of this these banks have stricter reg requirements than other banks.

https://youtu.be/f3erJNklEEI

What I quoted says the exact opposite of that. Here is another quote from the same BoE document:

... Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.
...

That is the exact opposite of what you're claiming.

You do understand the difference between a central bank guaranteeing reserve requirements, and how that is not the same as bailing out a bank, right?

If a bank fails to shore up reserves on the interbank market the central bank will never refuse to shore that up - and I don't know why you are mixing that up with a bank collapse, because that is a different thing altogether - capital requirements, MREL etc. have nothing to do with shoring up reserves on the interbank market.

KyussB wrote: »

What I quoted says the exact opposite of that. Here is another quote from the same BoE document:
... Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.
...
That is the exact opposite of what you're claiming.

You do understand the difference between a central bank guaranteeing reserve requirements, and how that is not the same as bailing out a bank, right?

If a bank fails to shore up reserves on the interbank market the central bank will never refuse to shore that up - and I don't know why you are mixing that up with a bank collapse, because that is a different thing altogether - capital requirements, MREL etc. have nothing to do with shoring up reserves on the interbank market.

Explain what you mean my shoring up reserves on the interbank market.

I am interested as the 99% of all interbank transactions are Repo's these days the days of banks lending each other money with no collateral disappeared after 08. The central bank has very little to do with such transactions.

The reason I mentioned MREL etc is because you said that central banks won't let banks fail.... which is not true.

KyussB wrote: »

What I quoted says the exact opposite of that. Here is another quote from the same BoE document:
... Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.
...
That is the exact opposite of what you're claiming.

No this is not the exact opposite of what I am claiming. Just to be clear what I have said is that a bank is not able to lend without funding in place... The majority of retail banks get this funding from customer deposits as this is a stable source of funds. If they want to increase lending and do not have sufficient funding they will either:
- Undertake a Deposit drive by paying for the funding by way of cutting margins on customer deposits to attract more deposits.
- package up debt and sell it on or undertake securitisation.
- Borrow from the interbank Market (to do this they normally need to post collateral so it defeats the point and is one of the main reason that the inter-bank market has shrunk since '08. The majority of interbank lending is undertaken via Repo's)
- Avail of TILRO from a central bank.

The majority of banks at the moment have capacity to lend thanks to QE but can't find customers within their risk appetites to lend to and as a result are forced to park the excess liquidity with the central bank or buy High Quality Liquid Assets (Both of which have negative yield at present and why banks are struggling to post a profit).

This is where QE has failed as the central bank has created the liquidity but the banks are unable to find desirable customers to lend to as they have saturated the market and is one of the main reasons why QE has not stimulated the economy pre covid as the cash never makes it into circulation outside of the Financial institutions with the exception of Funds investing in Assets. Which has driven up the price and reduced the yield on the assets to such a point that there is a massive bubble waiting to popped once the yield on government debt increase due to inflation or when the market decides that they don't want to buy bonds from country x because of the risks involved whether it be default or devaluation of the currency.

You are wrong, everything I've quoted explicitly says banks can lend without funding already being in place. Here is the Bundesbank, saying the same thing:

...
In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers.
Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer's bank account in return.
This means that banks can create book money just by making an accounting entry: according to the Bundesbank's economists, "this refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers".
By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).
...

https://www.bundesbank.de/en/tasks/topics/how-money-is-created-667392

That absolutely is the exact opposite of what you're claiming. The very act of lending creates deposits as well, adding new deposits to the banking system - providing all the deposits the banking system needs in aggregate, to meet its various regulatory requirements.

On the interbank market: When a bank is running short of its reserve requirements (which need to be settled once every couple of weeks or so, depending on the country), then it goes to the interbank market and seeks a loan from another bank - if no other bank is able to facilitate this, then the central bank will in practice, never refuse to facilitate this - because it is impossible to refuse that without collapsing part of the economy, as to meet reserve requirements, the bank have to recall loans, cancel contracts already made etc. etc. - there is simply no precedent of a loan recall like that ever being attempted.

Wanderer78

Incredible work kyuss, thank you

KyussB wrote: »

You are wrong, everything I've quoted explicitly says banks can lend without funding already being in place. Here is the Bundesbank, saying the same thing:
...
In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers.
Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer's bank account in return.
This means that banks can create book money just by making an accounting entry: according to the Bundesbank's economists, "this refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers".
By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).
...
https://www.bundesbank.de/en/tasks/topics/how-money-is-created-667392

That absolutely is the exact opposite of what you're claiming. The very act of lending creates deposits as well, adding new deposits to the banking system - providing all the deposits the banking system needs in aggregate, to meet its various regulatory requirements.

On the interbank market: When a bank is running short of its reserve requirements (which need to be settled once every couple of weeks or so, depending on the country), then it goes to the interbank market and seeks a loan from another bank - if no other bank is able to facilitate this, then the central bank will in practice, never refuse to facilitate this - because it is impossible to refuse that without collapsing part of the economy, as to meet reserve requirements, the bank have to recall loans, cancel contracts already made etc. etc. - there is simply no precedent of a loan recall like that ever being attempted.

The reserve requirements that a bank needs x amount of cash with the central bank on a specific reserve account during the reserve period is easily meet by every bank at the moment as they are awash with excess liquidity that they can’t lend without increasing their risk appetite.

Most central banks have separate accounts for reserve requirements and their main RTGS account with the central bank. The requirement in most countries is that an average of X amount is required over the reserve period..so in theory a bank could fail to meet its reserve requirements for 30+ days and on the last day of the reserve period place a few billion so that the average is meet. If the bank did this and did not have sufficient cash on the RTGS account to move to the reserve account then the bank would avail of the Operating standing facilities of the central bank but to do so the bank would need to post collateral which would be exchanged for a cash credit to bank the RTGS account.

If the bank didn’t have eligible collateral available on its balance sheet it would undertake a reverse repo with another bank to get it so they could post the collateral to the central bank. The days of unsecured interbank lending is all but disappear since 08.

In practice banks would like to place more than their reserve requirements on this account as it attracts a zero rate for deposits as opposed to the RTGS account with the central bank that currently gets charged a negative rate.

With regards a loan creating a deposit I never argued against that what I said is that a bank can not undertake lending without adequate funding in place.

- If the customer doesn’t use the loan and instead leaves the cash on deposit it in a account with the same bank the entry is
dr customer loan and cr customer deposit . As we know this is not what normally happens as the customer has drawn down a loan for a specific purpose.

- if the customer draws down the loan and uses it to pay mr X for xyz and mr X also banks with the same bank then the entry still remains DR customer loan and Cr deposit.

- if the customer doesn’t bank with the same bank for the example call it bank ‘A.
then the entry is
dr customer loan. Cr bank ‘A’ RTGS account with central bank
Dr. Bank ‘b’ RTGS account with the central bank
Cr customer deposit

If this transaction brought the rtgs account with the central bank overdrawn at the end of the day then as I described above the bank would need to avail of the central banks OSF and as a result post collateral instead of cash to square up at the end of the day.

These examples all relate to the day to day operation and have nothing to do with the funding the loan book that I am referring to (Which in Ireland is mainly provided via customer deposits)

The bank needs funding in place in order to be able to lend and meet its reg requirements. If the bank is constrained by liquidity which you seem to imply in your example then the bank needs to get this liquidity in place before it can lend. And just to be clear I am not saying they need 100 customer deposits to lend 100 as the type and term of the customer deposits is important to provide the funding. If the bank received a deposit of 100 from a fund overnight it would be practically useless under LCR from a funding point of view. If the same fund deposited this 100 on a term greater than the LCR window or put in a notice account greater than the LCR window then yes it would provide funding that a bank could use for lending. As I have said previously this is not a constraint for most banks to lend at the moment as they are awash with liquidity and have adequate capital to enable them to lend but can’t find enough customer within their risk appetite to lend to.

coolshannagh28

Wanderer78 wrote: »

Incredible work kyuss, thank you

Very learned contributions yes but the whole thing is based on confidence; the confidence other countries or unions have in your ability to back up your printing with growth in output . We may test these limits .

coolshannagh28 wrote: »

Very learned contributions yes but the whole thing is based on confidence; the confidence other countries or unions have in your ability to back up your printing with growth in output . We may test these limits .

Correct as if investors loose confidence they yield will rise on the government debt and it becomes more expensive to rollover the debt.

If we look at country as commercial company we will se the next
The company with low income does not create any profit and do huge spending taking money from bank to survive
Any normal bank would not give money to that company or would give at 250 per cent per year rate as speedy credit companies does do.
That mean capitalism model does not work as it should and it is matter of time when financial system will collapse if not already
To save the existing capitalism system from collapse central banks has print money ! When main law of capitalism says Money must make Money !
The economy of EU was booming when new members signed in
The banks was giving money the countries was getting cheap labor and companies of old members of EU was entering to new markets selling more production same way as conquistadors from Europe came in America
Because companies of new EU members did not make production by EU standards and was not allowed to sell it in EU they simply closed down.
In reality East European economies was dead due with wild capitalism time since USSR system collapsed and all what EU was needed from new members is cheap labor and the internal markets of new EU members
And now everything stopped because Earth is a ball and start meet the end.
So what is going on now ? Overproduction no new markets plenty cheap labor in Africa but sadly unqualified.
There is no recession on way there is system collapse on way !

Timing belt wrote: »

...

You are conflating falling short of capital requirements, with falling short of reserve requirements.

If a bank fails to have enough collateral at hand, to the point that they become insolvent if they need to provide collateral to the central bank in return for their reserves being shored up - then they are insolvent, that has nothing to do with my argument about reserves - that is an issue with capital requirements, not reserve requirements...

Do not mix up capital-requirements/solvency, and shoring up reserves.

My point stands: The central bank will never fail to shore up the reserves of a bank, when asked - we can add "if the bank has enough collateral" to that if you like - but that doesn't alter my point.

This means that reserve requirements are not a restriction on lending - only capital requirements (and having to provide collateral when shoring up reserves with the central bank, just emphasizes this, it doesn't work against this point).

On bank lending:
Banks need to meet their capital requirements - those capital requirements don't "fund" the loans - the act of lending creates all of the financial assets (deposits, debts and collateral tied to them) needed to supposedly 'fund' further loans and meet capital requirements in the overall banking system.

Effectively (for the whole banking system in aggregate), the available capital for the banks to use for meeting their capital requirements, can expand as much as the economies demand for loans (within regulatory limits for giving out loans).

It is simply wrong and a major misunderstanding to compare that to outdated/wrong 'fractional reserve' i.e. 'money multiplier' theories of banking, through the use of the word 'fund' for describing this - that small semantic argument, does nothing to make the above anything like those theories.

coolshannagh28 wrote: »

Very learned contributions yes but the whole thing is based on confidence; the confidence other countries or unions have in your ability to back up your printing with growth in output . We may test these limits .

Timing belt wrote: »

Correct as if investors loose confidence they yield will rise on the government debt and it becomes more expensive to rollover the debt.

Not with the ECB's "whatever it takes" policies - the yield is closely tied to the ECB interest rate - which is tied through ECB policy, to Output levels i.e. inflation.

KyussB wrote: »

You are conflating falling short of capital requirements, with falling short of reserve requirements.

If a bank fails to have enough collateral at hand, to the point that they become insolvent if they need to provide collateral to the central bank in return for their reserves being shored up - then they are insolvent, that has nothing to do with my argument about reserves - that is an issue with capital requirements, not reserve requirements...

Do not mix up capital-requirements/solvency, and shoring up reserves.

My point stands: The central bank will never fail to shore up the reserves of a bank, when asked - we can add "if the bank has enough collateral" to that if you like - but that doesn't alter my point.

This means that reserve requirements are not a restriction on lending - only capital requirements (and having to provide collateral when shoring up reserves with the central bank, just emphasizes this, it doesn't work against this point).

On bank lending:
Banks need to meet their capital requirements - those capital requirements don't "fund" the loans - the act of lending creates all of the financial assets (deposits, debts and collateral tied to them) needed to supposedly 'fund' further loans and meet capital requirements in the overall banking system.

Effectively (for the whole banking system in aggregate), the available capital for the banks to use for meeting their capital requirements, can expand as much as the economies demand for loans (within regulatory limits for giving out loans).

It is simply wrong and a major misunderstanding to compare that to outdated/wrong 'fractional reserve' i.e. 'money multiplier' theories of banking, through the use of the word 'fund' for describing this - that small semantic argument, does nothing to make the above anything like those theories.

So can bank lend if it does not have funds? Please explain how?

In aggregate, in the whole banking system, bank lending creates the deposits, capital/collateral - all of the financial assets - needed to meet capital requirements.

Investments/Loans lead to Savings/Deposits - not the other way around, as you're trying to claim.

The only difference when looking at a single bank vs looking at the banking system in aggregate, is that it is also affected by competition between banks - but that doesn't add any useful details to this conversation.

KyussB wrote: »

.

Investments/Loans lead to Savings/Deposits

What do you mean by this?

KyussB wrote: »

In aggregate, in the whole banking system, bank lending creates the deposits, capital/collateral - all of the financial assets - needed to meet capital requirements.

Investments/Loans lead to Savings/Deposits - not the other way around, as you're trying to claim.

The only difference when looking at a single bank vs looking at the banking system in aggregate, is that it is also affected by competition between banks - but that doesn't add any useful details to this conversation.

You keep telling me what I claim and talking about fractional banking when I never mentioned anything about it.... Your are telling me I am talking about capital requirements when I have not refereed to them at all. Lets be clear on what I am saying... I am disputing your claim that a individual bank can just undertake as much lending as it likes... It can't as I have said it is constraint by capital and liquidity. Lets park the capital requirements as I have not mentioned anything about them up to now.... The point I am making is that a bank needs liquidity to be able to make loans. Your posts are implying that the central bank will provide this liquidity to the individual bank and I am saying that it won't. If the bank does not have sufficient High quality liquid assets/cash (either in notes, on a ledger, or with the central bank) it can not undertake the lending. The central bank will not provide them with the liquidity unless they have High quality liquid assets (normally government bonds) to post as collateral to receive cash from the central bank by way of availing of the Operating standing facility. You are implying that the central bank will provide them with this liquidity which I am saying is not correct.

I have not even touched on the NSFR requirements that a bank needs to comply with or the leverage ratio which would also prevent the bank from just lending as much as it likes.

So if I have got any of this wrong then please let me know where but stick to the point and stop referring to fractional banking or to capital requirements. If you want a conversation on those of course we can discuss once we close out your claim that a bank can lend as much as it wants and the central bank will provide the liquidity to enable them to do so.

Deleted User wrote: »

What do you mean by this?

Instead of people first Saving/Depositing their money into a bank, and then the bank Loaning/Investing that saved money - the act of Loaning/Investing creates new Savings/Deposits.

A lot of textbook teach it as 'Saving leads to Investment', but it is the other way around 'Investment leads to Saving' - which overturns a lot of basic macroeconomics.

The debate above about bank 'funding', is a way to try to hold onto the 'Saving leads to Investment' point of view - when that's not how it works.

KyussB wrote: »

but it is the other way around 'Investment leads to Saving' - which overturns a lot of basic macroeconomics.

But how does it work, in simple terms? I don't see any explanation for this theory.

KyussB wrote: »

Instead of people first Saving/Depositing their money into a bank, and then the bank Loaning/Investing that saved money - the act of Loaning/Investing creates new Savings/Deposits.

A lot of textbook teach it as 'Saving leads to Investment', but it is the other way around 'Investment leads to Saving' - which overturns a lot of basic macroeconomics.

The debate above about bank 'funding', is a way to try to hold onto the 'Saving leads to Investment' point of view - when that's not how it works.

Yet again putting words in my mouth... Where have I said that saving leads to investment? I have pulled you up on a specific point which I believe you are wrong on and it has noting to do with 'Saving leads to investment'

Deleted User wrote: »

But how does it work, in simple terms? I don't see any explanation for this theory.

In simple terms if the bank has capital, liquidity capacity and it makes a loan... the Cash from the loan will end up in the banking system somewhere down the line.

If bank 'A' lends to a customer and the customer purchases something from another customer of bank 'A' then the transaction in the bank's books is
DR Customer Lending
CR Customer Deposits.

if it involves another bank then the central bank will clear the funds
Bank 'A'
DR Customer Lending
CR RTGS Account (Central Bank)

Bank'B'
DR RTGS Account (Central Bank)
CR Customer Deposit

The point that I am making is that a bank is not able to just lend as much as it likes as it will become constraint by liquidity due to the LCR rules unless the bank has funding in place to enable it to lend.

Timing belt wrote: »

In simple terms if the bank has capital, liquidity capacity and it makes a loan... the Cash from the loan will end up in the banking system somewhere down the line.

If bank 'A' lends to a customer and the customer purchases something from another customer of bank 'A' then the transaction in the bank's books is
DR Customer Lending
CR Customer Deposits.

if it involves another bank then the central bank will clear the funds
Bank 'A'
DR Customer Lending
CR RTGS Account (Central Bank)

Bank'B'
DR RTGS Account (Central Bank)
CR Customer Deposit

The point that I am making is that a bank is not able to just lend as much as it likes as it will become constraint by liquidity due to the LCR rules unless the bank has funding in place to enable it to lend.

So it works both ways rather than one way or the other. Investment leads to savings and vice versa.

That makes sense. Thanks.

Timing belt wrote: »

You keep telling me what I claim and talking about fractional banking when I never mentioned anything about it.... Your are telling me I am talking about capital requirements when I have not refereed to them at all. Lets be clear on what I am saying... I am disputing your claim that a individual bank can just undertake as much lending as it likes... It can't as I have said it is constraint by capital and liquidity. Lets park the capital requirements as I have not mentioned anything about them up to now.... The point I am making is that a bank needs liquidity to be able to make loans. Your posts are implying that the central bank will provide this liquidity to the individual bank and I am saying that it won't. If the bank does not have sufficient High quality liquid assets/cash (either in notes, on a ledger, or with the central bank) it can not undertake the lending. The central bank will not provide them with the liquidity unless they have High quality liquid assets (normally government bonds) to post as collateral to receive cash from the central bank by way of availing of the Operating standing facility. You are implying that the central bank will provide them with this liquidity which I am saying is not correct.

I have not even touched on the NSFR requirements that a bank needs to comply with or the leverage ratio which would also prevent the bank from just lending as much as it likes.

So if I have got any of this wrong then please let me know where but stick to the point and stop referring to fractional banking or to capital requirements. If you want a conversation on those of course we can discuss once we close out your claim that a bank can lend as much as it wants and the central bank will provide the liquidity to enable them to do so.

The banking system in aggregate, having enough liquidity, is pretty much about being solvent - of meeting capital requirements.

If a bank is short on reserves, and needs to exchange 'eligible assets' to the central bank in order to receive reserves to meet reserve requirements - and if those 'eligible assets' are classed as allowing e.g. largely government bonds - then yes, the banking system may run into trouble if all governments are running a surplus, draining government bonds out of the system.

This both demonstrates an odd way that government surpluses are a bad thing that can cause financial instability - and it demonstrates that there is a core strong demand for government bonds for meeting reserve requirements.

Now, the central bank decides what counts as 'eligible assets' - and they aren't just going to let the banking system fail

- so the central bank will just expand what is considered as 'eligible assets', e.g. expanding it to cover residential mortgages and such (financial assets created through the act of lending) - and these kinds of expansions of eligible assets have been done routinely over the last decade, through QE and the various asset purchase programs.

All of this bolsters the fact that banks are not reserve constrained, when it comes to lending - only capital constrained - and that liquidity is more of an issue with solvency and thus meeting capital requirements.

KyussB wrote: »

The banking system in aggregate, having enough liquidity, is pretty much about being solvent - of meeting capital requirements.

If a bank is short on reserves, and needs to exchange 'eligible assets' to the central bank in order to receive reserves to meet reserve requirements - and if those 'eligible assets' are classed as allowing e.g. largely government bonds - then yes, the banking system may run into trouble if all governments are running a surplus, draining government bonds out of the system.

This both demonstrates an odd way that government surpluses are a bad thing that can cause financial instability - and it demonstrates that there is a core strong demand for government bonds for meeting reserve requirements.

Now, the central bank decides what counts as 'eligible assets' - and they aren't just going to let the banking system fail - so the central bank will just expand what is considered as 'eligible assets', e.g. expanding it to cover residential mortgages and such (financial assets created through the act of lending) - and these kinds of expansions of eligible assets have been done routinely over the last decade, through QE and the various asset purchase programs.

All of this bolsters the fact that banks are not reserve constrained, when it comes to lending - only capital constrained - and that liquidity is more of an issue with solvency and thus meeting capital requirements.

No the central bank can not just change it's 'eligible assets' and expand it to cover mortgages or some other debt. They specifically say that this is not not eligible.... instead the bank would need to use DWF or the EU equivalent and post the mortgages as collateral which in turn the bank would receive government bonds which they then could post as collateral to avail of the OSF lending facility.

Having sufficient liquidity is key to enable a individual bank to lend... yes there is sufficient liquidity in the banking system... In fact with QE there is way to much that it is causing banks issues.... But one bank can have adequate liquidity and another be short.... In such a circumstances the bank that is short will look to increase it's liquidity either via securitisation, availing of central bank asset purchase program or by offering more attractive rates to customers to entice them to move funds from the bank that is long on liquidity to their bank by paying better deposit rates. This is the funding that I am referring to that a bank needs to have in place to be able to lend if it short on liquidity.

Whatever way the asset swaps are structured, it's a de-facto expansion of eligible assets, undertaken through separate programs - where the separation is just a facade. It's a meaningless detail - as the central bank will not fail to shore up liquidity in the overall system - so it is irrelevant.

Individual banks may run into liquidity problems, sure - but the point stands that in the banking system overall, this is not an impediment to expanding loans, and is more of a solvency/capital-requirements concern at both an aggregate and individual bank level. I'm focusing on looking at this from the view of the overall banking system.

You seem to view liquidity as separate to capital requirements issues? I don't.

KyussB wrote: »

Whatever way the asset swaps are structured, it's a de-facto expansion of eligible assets, undertaken through separate programs - where the separation is just a facade. It's a meaningless detail - as the central bank will not fail to shore up liquidity in the overall system - so it is irrelevant.

Individual banks may run into liquidity problems, sure - but the point stands that in the banking system overall, this is not an impediment to expanding loans, and is more of a solvency/capital-requirements concern at both an aggregate and individual bank level. I'm focusing on looking at this from the view of the overall banking system.

You seem to view liquidity as separate to capital requirements issues? I don't.

Yes I view them separately as a bank may have capital but not liquidity and vice versa that would prevent them from lending... Likewise a bank may have sufficient liquidity and capital but may not have enough stable funding to cover the lending. (When I say funding here I am talking about stable liquidity which for most banks is provided by having the sticky deposits or notice/term deposits).

A bank may even have a sufficient NSFR and capital but may still be restrained from lending due to the leverage ratio. The point that I was making is that a bank can not just undertake as much lending as it likes as all the regulation introduced since 08 have constraints on the bank.

I know you have said that there is sufficient liquidity/collateral in the total banking system but if you look back to the start of Covid there wasn't sufficient collateral in place as the central banks had been buying government bonds and the pool of bonds available in the banking system was reduced as a result and once margin calls kicked it left all the banks looking for more collateral to cover the margin calls.... This nearly brought down the whole system before the central banks stepped and fixed the problem.

I view all of that as a solvency/capital-requirements issue. I don't see the point in breaking that down into more and more granular issues - that only serves to obscure things. There are two general classes of issues - capital requirements and reserve requirements - and it doesn't add anything to the discussion, to break the former down into more and more detail.

If there is enough demand for loans and the only thing stopping the overall banking system from providing them is liquidity, the central bank will accommodate that - including by (one way or the other, obfuscated through several different programs if need be) expanding 'eligible assets' that can be swapped for shoring up reserves.

All of that leading to restating the point, that bank lending is constrained by capital requirements - it is not constrained by reserve requirements - deposits do not 'fund' loans, loans create deposits - and that ultimately the quantity of loans/money is determined from within the economy (endogenously) by demand for loans, not from outside the economy by the central bank (exogenously) - with the interest rate and regulations placed on loan issuance, tempering the demand for loans.

KyussB wrote: »

I view all of that as a solvency/capital-requirements issue. I don't see the point in breaking that down into more and more granular issues - that only serves to obscure things. There are two general classes of issues - capital requirements and reserve requirements - and it doesn't add anything to the discussion, to break the former down into more and more detail.

This does not obscure things as all the points I mentioned need to be taken into account for a individual bank to lend. It is not just about a bank being adequately capitalised. If it was it would make banking a lot more simple and riskier.

If there is enough demand for loans and the only thing stopping the overall banking system from providing them is liquidity, the central bank will accommodate that - including by (one way or the other, obfuscated through several different programs if need be) expanding 'eligible assets' that can be swapped for shoring up reserves.

At the overall banking level yes but not at a individual bank level and banks fail at a individual level and all it takes is one bank to get into difficulty to put pressure on all other banks.

All of that leading to restating the point, that bank lending is constrained by capital requirements - it is not constrained by reserve requirements - deposits do not 'fund' loans, loans create deposits - and that ultimately the quantity of loans/money is determined from within the economy (endogenously) by demand for loans, not from outside the economy by the central bank (exogenously) - with the interest rate and regulations placed on loan issuance, tempering the demand for loans.

Yes I agree that demand for loans comes from the economy but a bank has it's risk appetite which limits who and the value of who they lend to.

At the moment consumers are not drawing down loans in fact they are paying them off which is destroying money. The banks are desperate to lend due to the amount of liquidity in the financial system but unless they take on more risk they are unable to do so as the market is saturated. The central bank can cut rates to try and drive demand but that hasn't worked for the past 4/5 years in fact you could argue that it has lead to banks being less profitable which has reduced competition as smaller banks are not able to cover the fixed costs of running a bank and have exited the market. (e.g. ulster, Kbc)

Except I'm talking about banking on an aggregate level, not individual banks, because I was talking about how money creation works and what the real limits on it are - which requires looking at the whole banking sector, not individual banks. So that's a page or two spent on details which (while illuminating and worth going over again, even if just for education use and refreshing my memory), don't help clarify the original point made.

I agree that the demand for loans now is constrained - that QE has been "pushing on a string" for years.

Wanderer78

Fascinating debate folks, thank you

Geuze

Confirmation today that the EU and the EA were in (technical) recession during 2020 Q4 and 2021 Q1.

https://ec.europa.eu/eurostat/documents/2995521/11563087/2-18052021-AP-EN.pdf/c892ab6d-ecc0-8152-00aa-929e2e838db4?t=1621325416766

Small falls in GDP during these two quarters.