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In the future, banks will legally lock you into term deposits; You will not have the right to break them unless the bank authorises it
Topic Started: 16 Nov 2012, 08:47 PM (3,167 Views)
b_b
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van
10 Aug 2014, 11:37 PM


Deposits created by the lending process......like the chicken before the egg?

The loan simultaneously creates the deposit (although it could be equally argued the deposit creates the loan, but we should try and keep it simple for the ordinary folk). For more, see link below
http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf
Edited by b_b, 10 Aug 2014, 11:44 PM.
(S – I) + (T - G) + (M - X) = 0
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herbie
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b_b
10 Aug 2014, 11:37 PM
Govt print who money? How? What mechanism? What happen when a banks assets start to go bad?
Ask Peter Fraser - He's the one who (I reckoned?) was telling me that banks no longer actually need deposits ...
Edited by herbie, 10 Aug 2014, 11:50 PM.
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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b_b
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herbie
10 Aug 2014, 11:48 PM
Ask Peter Fraser - He's the one who (I reckoned?) was telling me that banks no longer actually need deposits ...
As I said an individual bank need reserves to support its payments obligation wrt the deposit. The banking "system" always has all the Aud deposits it needs - depending on how you define "deposit".

Depending on how peter phrased it, he is probably right.

But count sound like he us a real expert on mmt. I would like to hear more.
Edited by b_b, 10 Aug 2014, 11:56 PM.
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Ned Flanders
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b_b
10 Aug 2014, 11:26 PM
Banks need reserves to support their payment obligations on behalf of customers who hold deposits.
No they don't. Banks don't need reserves, it's just a confidence trick for those who don't understand money. The RBA can create an unlimited amount of deposits, and by raising the denominations on bank notes, the mint can print an unlimited amount of cash. The only restriction in the modern monetary system is the loss of confidence in the ability of money to reflect fair value within a very short time period. If the value of money halves every day, it's utility as a medium of exchange disappears.
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" ... which is that all-too-familiar dynamic in Irish life where people tell lies, cover them up and create all sorts of collateral damage, sometimes spread out over decades, and never take responsibility."
- Alan Glynn
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van
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I have never heard of a bank unable to lend because they do not have enough deposits...... :hmm:
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peter fraser
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herbie
10 Aug 2014, 11:48 PM
Ask Peter Fraser - He's the one who (I reckoned?) was telling me that banks no longer actually need deposits ...
Banks need deposits to cover their existing loan book, but they don't need a pre-existing deposit to make a new loan. The loan makes the deposit.
Any expressed market opinion is my own and is not to be taken as financial advice
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b_b
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van
11 Aug 2014, 02:11 AM
I have never heard of a bank unable to lend because they do not have enough deposits...... :hmm:
That right - because the loan creates the deposit. The central bank then supplies the required reserves to maintain an orderly payment system. Count, and main stream commentators like macro business will have you think the money needs to be borrowed from overseas to "fund" australian mortgages. But this is not an accurate description of the monetary system.
Ned Flanders
11 Aug 2014, 12:39 AM
No they don't.
The Bank of England disagrees with you
http://www.bankofengland.co.uk/publications/documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
So does S&P
http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf
And the US fed
http://www.federalreserve.gov/monetarypolicy/reservereq.htm
And the RBA
http://www.rba.gov.au/payments-system/esa/
etc etc
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The RBA can create an unlimited amount of deposits

Not quite. The RBA can create unlimited amount of reserves. Reserves being bank deposits with the CB. The reserves support the deposits in the system.
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and by raising the denominations on bank notes, the mint can print an unlimited amount of cash

True - but this has nothing to do with your argument "banks don't need reserves".
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The only restriction in the modern monetary system is the loss of confidence in the ability of money to reflect fair value within a very short time period.

There are a couple of restrictions reflecting both regulatory and economic constraints.

Banks are restricted by capital (equity), reserves and credit worthy customers (bank defined). However, MMT argues reserves are never a true constraint so long as the Central Bank targets an official cash rate (OCR). By targeting an OCR, the central bank will always supply the system (as opposed to a bank) with enough reserves to maintain a stable interest rate.

A loss of confidence in the "Asset quality" of a particular bank, may result in a run on that bank. The bank will honour these withdrawals with its reserves. When they are out of reserves, game over. That is why a Bank need reserves.
Edited by b_b, 11 Aug 2014, 11:55 AM.
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Ned Flanders
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b_b
11 Aug 2014, 09:23 AM
These are regulatory requirements, not actual requirements. As I stated before, it is a confidence trick.
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Not quite. The RBA can create unlimited amount of reserves. Reserves being bank deposits with the CB. The reserves support the deposits in the system.

So wait, the RBA can't create an unlimited amount of deposits,but it can create an unlimited amount of reserves, which are deposits. Yea?
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True - but this has nothing to do with your argument "banks don't need reserves".

It does in the case where the government nationalises the bank.
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There are a couple of restrictions reflecting both regulatory and economic constraints.

A loss of confidence in the "Asset quality" of a particular bank, may result in a run on that bank. The bank will honour these withdrawals with its reserves. When they are out of reserves, game over. That is why a Bank need reserves.

As you stated above, the RBA can create an unlimited amount of reserves. If the RBA decides it won't create those reserves, the government can create them by nationalising the bank and issuing bonds to honour all withdrawals.
------------------------------
" ... which is that all-too-familiar dynamic in Irish life where people tell lies, cover them up and create all sorts of collateral damage, sometimes spread out over decades, and never take responsibility."
- Alan Glynn
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b_b
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Ned Flanders
11 Aug 2014, 08:49 PM
These are regulatory requirements, not actual requirements. As I stated before, it is a confidence trick.
Regulation is a reality - you can ignore it if you want, but I think is more sensible to discuss the system as it actually works. Anyway, as I state below, reserves are required to settle transactions on behalf of customers. (I even give you an example to help).
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So wait, the RBA can't create an unlimited amount of deposits,but it can create an unlimited amount of reserves, which are deposits. Yea?

As I said - reserves are DEPOSITS that Banks hold at the RBA. I also said "Not Quite". Meaning if the RBA transacts with the private sector (i.e.: buys a bond from an individual), then that individual will get a deposit in exchange for his / her bond (and the client bank gets the reserves). Either way the deposit is not granted ex-nihilo - there must be an exchange. That is a long way from saying the RBA can create as many deposits it wants.
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It does in the case where the government nationalises the bank.

But the banks are not nationalised. So are you saying Banks DO need reserves unless they are nationalised? That's a difference to argument to the one you put up earlier. Anyway, I would still reject that statement. The reserves are needed to settle transactions on behalf of depositors irrespective of the ownership structure. See example below for more details.
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As you stated above, the RBA can create an unlimited amount of reserves. If the RBA decides it won't create those reserves, the government can create them by nationalising the bank and issuing bonds to honour all withdrawals.

Ok - so the government issues the bond to honour the withdrawals.

So how do I get my cash from "bad bank"? It is this next step you seem to be missing.

Someone has to buy the bonds issued by the government. The buyer of the bonds settles the trade by transferring their deposit / Reserves from their current bank to "bad bank". This then allows "bad bank" to redeem deposits - because it now has reserves.

You seem unaware how banks clear funds when customers pay for items from each other. To help you understand I will give you an example;

When I pay for a new car, I transfer $35k from my bank account (NAB) to the car dealers bank account (ANZ). My deposit falls by $35k, and the Car dealers deposits increase by $35k. To settle the trade, NAB transfers $35k of its reserves to the ANZ. So in effect NAB's assets (reserves) and liabilities (deposits) both fall by $35k, and ANZ's assets and liabilities both rise by $35k. Funds are cleared and the purchase is complete.

If NAB did not have reserves it could not honour my payment. That is why reserves are needed.
Edited by b_b, 12 Aug 2014, 12:06 PM.
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Elastic
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A couple of questions b_b.
When a government deficit spends by selling bonds, does it create excess reserves in the banks?
Why is there such a disparity between the total deposits and total loans in the Australian banking system? Previously you had suggested that even foreign holders of $Aus would have their money deposited in our banks, but there seems to be less deposits than loans on the banks' balance sheets. Where are the missing $Aus?
Only a rat can win a rat race.

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