RBA Minutes of the Monetary Policy Meeting of the Reserve Bank Board September 2013; Big bet on housing paying off. Rate cut possible, but not imminent.
Well, if the loan books keep growing, at some stage the banks either have to securitize or they have to raise equity to meet capital adequacy requirements. So maybe credit growth does result in capital being tied up in bank equity.
But it is pretty obvious that if I buy a house then my capital is reduced by the same amount as the vendor's capital is increased so house price rises or falls have no nett impact on the amount of capital tied up in housing. The capital tied up in a house is the amount it cost to build it and subsequently maintain it, and that is independent of market price.
He lending process is simple.
Credit is assessed and approved.
The customer receives a deposit and a loan.
The deposit is transferred to he seller of the desired item.
Banks then look for reserves after.
Central banks will always supply he required reserves because they manage reserves to target interest rates.
The only constraint is credit worthy customers and equity. But equity increases with retained earnings. Also, equity can be sourced if the credit is perceived to be priced correctly (from the growing pool of deposits).
The loan creates the deposit. Capital is never diverted - it is in fact created.
The deposit is transferred to he seller of the desired item.
Banks then look for reserves after.
Central banks will always supply he required reserves because they manage reserves to target interest rates.
The only constraint is credit worthy customers and equity. But equity increases with retained earnings. Also, equity can be sourced if the credit is perceived to be priced correctly (from the growing pool of deposits).
The loan creates the deposit. Capital is never diverted - it is in fact created.
Securitisation.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
Securitisation usually happens after the lending process.
The loan creates the deposit.
The loan is sold to investors, who use their deposits to purchase.
So for the banking system, the loans and deposits reduce simultaneously.
Securitisation allows banks to hold liabilities off balance sheet thus enhancing their lending capability.
And, while I am not against it per se, well.. you know the rest
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
Securitisation allows banks to hold liabilities off balance sheet thus enhancing their lending capability.
And, while I am not against it per se, well.. you know the rest
By reducing the loan book, the bank now requires less equity to support its operations. It is more about enhancing roe since the bank keeps the origination fee. But as you can see by my example, from a system wide funding perspective, securitisation causes the reduction of loan and deposit. So it does not enhance funding. That is because Banks are never reserve constrained - so capital is never diverted to or from anywhere.Think of it this way - have you ever heard of anyone getting credit approval for a loan, and told to come back next week when the bank has the funds?
No.
Strange isn't it? Restaurants run out of specials, retailers run out of stock? Why not banks.
Because the Loan creates the deposit. Google it. Heaps of academic support or this. Even S&P have caught on.
By reducing the loan book, the bank now requires less equity to support its operations. It is more about enhancing roe since the bank keeps the origination fee. But as you can see by my example, from a system wide funding perspective, securitisation causes the reduction of loan and deposit. So it does not enhance funding. That is because Banks are never reserve constrained - so capital is never diverted to or from anywhere.Think of it this way - have you ever heard of anyone getting credit approval for a loan, and told to come back next week when the bank has the funds?
No.
Strange isn't it? Restaurants run out of specials, retailers run out of stock? Why not banks.
Because the Loan creates the deposit. Google it. Heaps of academic support or this. Even S&P have caught on.
Yeah but so what?
All these checks and balances are pretty damn useless when dislikeable persons like Dick Fuld and co are the ones writing the loans.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
The loan creates the deposit. Capital is never diverted - it is in fact created.
As far as I can tell capital is neither created or destroyed in the lending process or the purchase process. M2 money supply changes, but that is not a measure of capital.
If a bank is forced to issue shares to increase equity as a result of its risk-weighted assets increasing then that is a use of capital though.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
As far as I can tell capital is neither created or destroyed in the lending process or the purchase process. M2 money supply changes, but that is not a measure of capital.
If a bank is forced to issue shares to increase equity as a result of its risk-weighted assets increasing then that is a use of capital though.
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