Isn't the Tier 1 capital requirement just the money multiplier in a fancy ball dress?
No.
Tier 1 capital reflects the equity in a banks balance sheet. The equity + deposits = assets (loans).
The equity can increase at any time (subject to price) by a rights issue or placement of new shares. Operationally, as investors subscribe for new capital, deposits decrease and equity increases. Of course the total number (deposits + liabilities) stays the same. Which of course means total assets (loans) stays the same too.
Of course this means banks now have more capital relative to loans and allows then to create more "money" endogenously while staying above the regulatory Tier capital ratio. Since the banks create the deposits as they create the loan, there is no real external limit as to how many loans a bank can write.
This whole process may sound like the money multipler, but it is not.
The money multiplier (MM) assumes banks receive loans from the central bank, and on lend to customers (90% lent - 10% kept on reserve). In that sense, the MM is based on the belief money supply is controlled by the central bank and created exogenously.
This is why there has been so much unfounded fear about QE2. Bank reserves have skyrocketed as the Fed swaps cash for bonds. The MM falsely predicts these new reserves will explode into the financial system creating inflation etc. Of course no such thing has happened, because the MM is a myth.
Tier 1 capital reflects the equity in a banks balance sheet. The equity + deposits = assets (loans).
The equity can increase at any time (subject to price) by a rights issue or placement of new shares. Operationally, as investors subscribe for new capital, deposits decrease and equity increases. Of course the total number (deposits + liabilities) stays the same. Which of course means total assets (loans) stays the same too.
Of course this means banks now have more capital relative to loans and allows then to create more "money" endogenously while staying above the regulatory Tier capital ratio. Since the banks create the deposits as they create the loan, there is no real external limit as to how many loans a bank can write.
This whole process may sound like the money multipler, but it is not.
The money multiplier (MM) assumes banks receive loans from the central bank, and on lend to customers (90% lent - 10% kept on reserve). In that sense, the MM is based on the belief money supply is controlled by the central bank and created exogenously.
This is why there has been so much unfounded fear about QE2. Bank reserves have skyrocketed as the Fed swaps cash for bonds. The MM falsely predicts these new reserves will explode into the financial system creating inflation etc. Of course no such thing has happened, because the MM is a myth.
Actually, the main reason cited for inflation not skyrocketing in America is because many of those banks are not using all that injected capital to loan out to new borrowers, thus it is not driving up a massive new debt splurge....
Tier 1 capital reflects the equity in a banks balance sheet. The equity + deposits = assets (loans).
The equity can increase at any time (subject to price) by a rights issue or placement of new shares. Operationally, as investors subscribe for new capital, deposits decrease and equity increases. Of course the total number (deposits + liabilities) stays the same. Which of course means total assets (loans) stays the same too.
Of course this means banks now have more capital relative to loans and allows then to create more "money" endogenously while staying above the regulatory Tier capital ratio. Since the banks create the deposits as they create the loan, there is no real external limit as to how many loans a bank can write.
This whole process may sound like the money multipler, but it is not.
The money multiplier (MM) assumes banks receive loans from the central bank, and on lend to customers (90% lent - 10% kept on reserve). In that sense, the MM is based on the belief money supply is controlled by the central bank and created exogenously.
This is why there has been so much unfounded fear about QE2. Bank reserves have skyrocketed as the Fed swaps cash for bonds. The MM falsely predicts these new reserves will explode into the financial system creating inflation etc. Of course no such thing has happened, because the MM is a myth.
Actually, the main reason cited for inflation not skyrocketing in America is because many of those banks are not using all that injected capital to loan out to new borrowers, thus it is not driving up a massive new debt splurge....
Is this not correct ?
That is what is cited.
But it is incorrect.
Banks were not injected with any capital from QE2. They simply swapped bonds for cash. Their total assets were unchanged. Which mean their total liabilities (deposits) were unchnaged. No new money in the system at all.
The banks are in no better, or worse position to write a loan post QE2.
Banks were not injected with any capital from QE2. They simply swapped bonds for cash. Their total assets were unchanged. Which mean their total liabilities (deposits) were unchnaged. No new money in the system at all.
The banks are in no better, or worse position to write a loan post QE2.
Yes, same in the UK. QE there gave the banks an additional $200b reserves but they gave up assets to the BOE leaving themselves no better off on the balance sheet. The bonds they gave the BOE in return went up in price and gave the BOE a profit on the QE exercise.
Reserves can be used like cash and for that reason some call QE "printing" money. But there really is a difference between QE where the cash is paid for with assets compared with simply printing money without that money being paid for. True printing would involve the CB just giving fresh notes or reserves to the banks and/or government and asking nothing in return. That would justify inflation fears if it were to happen.
Reserves can be used like cash and for that reason some call QE "printing" money. But there really is a difference between QE where the cash is paid for with assets compared with simply printing money without that money being paid for. True printing would involve the CB just giving fresh notes or reserves to the banks and/or government and asking nothing in return. That would justify inflation fears if it were to happen.
And of course that never happens.
"Money printing", for lack of a better term, comes when a government deficit spends.
When a government is a sole monopoly supplier of its own currency, and has a free and floating exchange rate, deficits spend money into existance.
The private sector then places the "net spending" on deosit with the private banks. Banks then have liabilities > assets. So goverment issue bonds to keep banks profitable and help balance their books.
That is how net financial assets come into existance. And that is the nature of "money printing".
QE is inflationary, when the US fed trades cash for the 10 year it increases liquidity, new cash chasing return. when the Fed trades cash for assets through TARP, TALP and any other acronym they can dream up. They swap cash (liquidity) for assets-CDO's etc, now these transactions do not have an effect on the banks balance sheet, although they do avoid having to mark these assets to market, because for many of them there is no market. The Fed is the buyer of last resort. Technically the Fed's actions strenghthen Bank balance sheets and inject liquid funds which will usually end up chasing returns. It is not too hard to imagine a percentage of these funds have ended up in the oil/ commodities complex.
Enjoy The Ride!
Enjoy The Ride!
The case for individual freedom rests chiefly on the recognition of the inevitable and universal ignorance of all of us concerning a great many of the factors on which the achievement of our ends and welfare depend. It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it. Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen.” ― Friedrich A. von Hayek
"I, on the other hand, am a fully rounded human being with a degree from the university of life, a diploma from the school of hard knocks, and three gold stars from the kindergarten of getting the shit kicked out of me." Blackadder.
QE is inflationary, when the US fed trades cash for the 10 year it increases liquidity, new cash chasing return. when the Fed trades cash for assets through TARP, TALP and any other acronym they can dream up. They swap cash (liquidity) for assets-CDO's etc, now these transactions do not have an effect on the banks balance sheet, although they do avoid having to mark these assets to market, because for many of them there is no market. The Fed is the buyer of last resort.
Enjoy The Ride!
I never mentioned TARP. I was discussing QE2.
Quote:
Technically the Fed's actions strenghthen Bank balance sheets and inject liquid funds which will usually end up chasing returns. It is not too hard to imagine a percentage of these funds have ended up in the oil/ commodities complex.
Utter rubbish.
Why would a bank, who holds a bond (risk weighting under Basel II of zero), sell that bond for cash, and go and punt the Copper market?
So if QE is so inflationary, can you please explain why QE has not had the predicted effect in Japan. Japan started QE in 2001 and continued to 2006.
QE is inflationary, when the US fed trades cash for the 10 year it increases liquidity, new cash chasing return. when the Fed trades cash for assets through TARP, TALP and any other acronym they can dream up. They swap cash (liquidity) for assets-CDO's etc, now these transactions do not have an effect on the banks balance sheet, although they do avoid having to mark these assets to market, because for many of them there is no market. The Fed is the buyer of last resort.
Enjoy The Ride!
I never mentioned TARP. I was discussing QE2.
Utter rubbish.
Why would a bank, who holds a bond (risk weighting under Basel II of zero), sell that bond for cash, and go and punt the Copper market?
So if QE is so inflationary, can you please explain why QE has not had the predicted effect in Japan. Japan started QE in 2001 and continued to 2006.
Inflationary impact? Zippo!
So b_b - do you say there is no link between QE, food price inflation and the Arab Spring?
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
So b_b - do you say there is no link between QE, food price inflation and the Arab Spring?
I think there is a lot of ignorance about QE. One need look no further than this site. However, even mainstream economists do not fully comprehend the mechanics of QE.
So that ignorance funnels its way into fear / greed. Since the mainstream think this is all about "printing money", traders and money managers (not banks) try to protect themselves against mythical inflation- thereby pushing up commodities. It becomes self fulfilling.
But is there more underlying demand for (say) copper post QE2? We just saw the US job numbers for June (terrible). So its not because demand is any better. And supply has been increasing.
QE has done nothing but altered some bank balance sheets - speculation based on ignorance has pushed up commodity prices.
b-b riddle me this,why would a bank sell a risk free 10 yr to the FED? you are implying it is a zero sum game. Also you should do your homework QE involved the purchase of Bonds, Mortgage Backed securities and Other financial instruments.
QE was designed to expand the FED's balance sheet, and yes I believe that is inflationary. Normal OMO open market operations by a central bank are usually funded by asset sales, hence the central bank does not normally expand its balance sheet. Japan was suffering deflation when QE was implemented in 2001 the BOJ targeted a zero interest rate until inflation moved to zero or above and this is when QE was removed in 06. If you had any knowledge of the history of QE you would know it is designed to create inflation/ halt deflation. I would like to know what you think QE is designed to do. Before you rubbish someone's views you should do some basic research.
Enjoy The Ride!
Enjoy The Ride!
The case for individual freedom rests chiefly on the recognition of the inevitable and universal ignorance of all of us concerning a great many of the factors on which the achievement of our ends and welfare depend. It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it. Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen.” ― Friedrich A. von Hayek
"I, on the other hand, am a fully rounded human being with a degree from the university of life, a diploma from the school of hard knocks, and three gold stars from the kindergarten of getting the shit kicked out of me." Blackadder.
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