Would you accept that a loan also creates a deposit?
No, it doesn't. Only a depositor can create a deposit.
If you borrow money for a house, say 400k.....does 400k suddenly appear in your deposit account......no...of course not. They might require you to have a deposit account with them for 100k. You buy a 500k house, then near settlement day the bank takes the 100k from your deposit account and adds it to 400k they have in available funds and pays the vendor 500k.
You only get credit extended directly in your deposit account via way of a small personal loan.
You're confusing credit with money.....two different animals.
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
No, it doesn't. Only a depositor can create a deposit.
If you borrow money for a house, say 400k.....does 400k suddenly appear in your deposit account......no...of course not. They might require you to have a deposit account with them for 100k. You buy a 500k house, then near settlement day the bank takes the 100k from your deposit account and adds it to 400k they have in available funds and pays the vendor 500k.
You only get credit extended directly in your deposit account via way of a small personal loan.
You're confusing credit with money.....two different animals.
The vendor now has 500k in his account. Is that not a deposit?
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
The vendor now has 500k in his account. Is that not a deposit?
That $500k in the vendor's account is a liability which had to be immediately met by a transfer of funds from the loan issuing bank to the vendor's bank (probably via CB reserve accounts). That obligation on the loan issuing bank could only have been fulfilled if they had the funds available that they lent. The $500k appearing in the vendor's account must have previously existed and been available funds to the loan issuing bank. That supports the Count's assertion.
There is no new deposit. The $500k must have previously existed as reserves of the loan issuing bank in that bank's reserve deposit account with the CB or in some other account.
Edit add: I confess that I'm not always consistent on this issue. Pertly because I don't fully understand it and partly because I have trouble clearly expressing my understanding.
The vendor now has 500k in his account. Is that not a deposit?
It could be, in which case it remains on the money market and can be used to create a new loan. Or he could go and snort 500k of cocaine and winds up in the drug dealers cache.
However if credit was the same as money, then why do they print money? Why do general prices double when the amount of printed money doubles? The secret is that credit and debit cancel each other out. Where as money is something that exists interdependently by itself.
There's a genuine issue here which the current "loans create deposits" mantra fails to address. I'm with Wulfie on this.
Begin with a closed system of 3 banks and 6 customers.
Abe has $100 on deposit with bank A Bill has $100 on deposit with bank B Carrie has $100 on deposit with bank C
Debbie has a $100 loan from bank A Ellie has a $100 loan from bank B Fred has a $100 loan from bank C
Banks A, B and C each have CB stipulated $10 of reserves with the CB (therefore each bank has $110 assets and $100 liability). They have equity and are solvent.
Greta wants a $100 loan. Where does she get it from? Neither bank A, nor bank B, nor bank C are in any position to give Greta a loan. If any of them write a $100 loan for Greta they will be totally unable to meet the obligations arising from that loan if that loan money is spent with customers of any other bank.
To go beyond the closed system you might say that the bank can borrow the $100 from elsewhere. That is to support Wulfie's statement that dollars have to be supplied from somewhere else. But the Aussie banking system is a closed system centred around CB reserves out of which all obligations arising from loans are met. Interest rates are irrelevant. There is no excess money in the above system which can be obtained to meet obligations arising from loan issuance.
I think we are regressing here! It took me a while to think through some of the actual mechanics, but I am sure now that the "loan creates the deposit" view is correct. In fact, your example proves it - you just need to think to the next level about what happens *operationally* in the banks in your example.
Firstly - forget the central bank/ESA account reserve bit - as I think you know, there is no such requirement in our system. There are requirements for the bank to hold a certain level of equity/capital relative to the loans on issue, so let's just presume in your example those requirements are met.
then, re this point: "If any of them write a $100 loan for Greta they will be totally unable to meet the obligations arising from that loan if that loan money is spent with customers of any other bank." - that is not correct.
When presented with a demand to settle the $100 from another bank, Greta's bank has two choices:
1) they can try and raise some deposits independently, but let's presume in your closed system example they are unable to do that (although they could if they offered a better deposit rate than the other banks perhaps - problem solved for them, but created for another one of the 3 banks). Failing that:
2) they go to the inter-bank overnight market and borrow the money from another bank at the RBA cash rate - remember wherever Greta's $100 loan cash ended up - that bank now has (or will have when the demand is settled) *excess* reserves. They can plan to leave that in their ESA account and earn cash rate minus 0.25%, or they can lend it back to Greta's bank at cash rate, = more profit. So of course they will lend it. In this way everything always ends up balancing out under the "loan creates the deposit" view at the end of the business day.
Remember also that in the worse case, if for some reason Greta's bank can't get the cash to cover the demand on them form the overnight inter-bank market, they can still get the funds directly from the RBA via the discount window - but they will pay a penalty rate of cash rate plus 0.25% for the privilege.
Bottom line, Greta's bank can lend as much money as they want - their constraints are only finding credit worthy borrowers, and their available capital (as per capital / asset ratios enforced by the regulator). Every time they write a loan, they will always be able to fund any demand on them created based on where the loaned funds end up in the system.
EDIT - this is also fundamentally why the overnight cash rate is the primary driver of variable mortgage rates in Australia. Essentially when you take out a mortgage, the bank has to deal with the ongoing demands created due to the loan as per the process above every day for the outstanding loan amount. And every day/month/year the cost of borrowing on the market overnight, or from the RBA discount window, or of raising deposits directly, will change based on the RBA set cash rate, hence the rate charge on the remaining balance of your loan moves accordingly as well, with enough margin to cover the banks operational costs and profit requirements.
There's a genuine issue here which the current "loans create deposits" mantra fails to address. I'm with Wulfie on this.
Begin with a closed system of 3 banks and 6 customers.
Abe has $100 on deposit with bank A Bill has $100 on deposit with bank B Carrie has $100 on deposit with bank C
Debbie has a $100 loan from bank A Ellie has a $100 loan from bank B Fred has a $100 loan from bank C
Banks A, B and C each have CB stipulated $10 of reserves with the CB (therefore each bank has $110 assets and $100 liability). They have equity and are solvent.
Greta wants a $100 loan. Where does she get it from? Neither bank A, nor bank B, nor bank C are in any position to give Greta a loan. If any of them write a $100 loan for Greta they will be totally unable to meet the obligations arising from that loan if that loan money is spent with customers of any other bank.
To go beyond the closed system you might say that the bank can borrow the $100 from elsewhere. That is to support Wulfie's statement that dollars have to be supplied from somewhere else. But the Aussie banking system is a closed system centred around CB reserves out of which all obligations arising from loans are met. Interest rates are irrelevant. There is no excess money in the above system which can be obtained to meet obligations arising from loan issuance.
That's the reserve-constrained case, which definitely applies in China and theoretically applied in the US but does not apply in Australia where there is no reserve requirement on deposits.
Australian banks are equity-constrained (they have to maintain a ratio of equity to risk-adjusted assets) and liquidity-constrained (they have to have enough liquid assets to cover a certain percentage of deposits) and they are constrained by APRA requirements, but they are not reserve-constrained.
The liquidity constraint seems to me to act in some ways like a reserve constraint though, except that MBS seem to be eligible to meet liquidity requirements in Australia.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
If you borrow money for a house, say 400k.....does 400k suddenly appear in your deposit account......no...of course not.
Actually, yes it does. This is exactly what happens. The loan is created, you have a loan account with the bank for $400k, and the bank gives you a deposit of $400k, which you normally issue via a cheque or whatever immediately to some party in exchange from some property or goods or whatever.
For Aussie property bears, "denial", is not just a long river in North Africa.....
That $500k in the vendor's account is a liability which had to be immediately met by a transfer of funds from the loan issuing bank to the vendor's bank (probably via CB reserve accounts). That obligation on the loan issuing bank could only have been fulfilled if they had the funds available that they lent. The $500k appearing in the vendor's account must have previously existed and been available funds to the loan issuing bank. That supports the Count's assertion.
There is no new deposit. The $500k must have previously existed as reserves of the loan issuing bank in that bank's reserve deposit account with the CB or in some other account.
Edit add: I confess that I'm not always consistent on this issue. Pertly because I don't fully understand it and partly because I have trouble clearly expressing my understanding.
Actually not. At the instant the loan is drawn down (or at least 20 minutes later when the bank cheque is deposited) the vendor's bank has a new $500k liability and a new $500k asset (the purchaser's bank now owes it $500k to settle the bank cheque.) The purchaser's bank has a new $500k asset (the loan) and a new $500k liability (the bank cheque)
That night all such cheques will be netted out, and banks will either borrow from each other or the CB will provide reserves to banks that need them at a slightly higher interest rate than the target overnight rate.
Total deposits across the two banks has grown by $500k, as has the money supply.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
One would imagine that as our cities spread, well situated inner city homes will become ever more desirable whether or not the median price is rising, with the proviso that the area does not change in nature (IE become a slum)
The desirable inner city locations that is close to transport,shopping , some areas which can be only minutes to the CBD should only do well.
This was my fathers ideology that suburbs close to the city, river locations should not fail to keep people interested. He understood for many yrs that the population will NOT reduce near the city.
It was a simple but successful concept to build & invest in this.
The risk of urban slum is really quite minimal as Perth is no way near involved in any overbuilding crises. The local councils are getting more strict in the quality of accomodations being built.
Inner city living is an attractive option for some people, in terms of housing costs & lessen the costs of maintaining vehicles.
Newjerk? can you try harder than dig up another person's blog. My first promo was with Billabong and my name in English is modified with a T, am Perth born but also lived in Sydney to make my $$ It's Absolutely Fabulous if it includes brilliant locations, & high calibre tenants..what more does one want? Understand the power of the two "P"" or be financially challenged Even better when there is family who are property mad and one is born in some entitlements.....Understand that beautiful women are the exhibitionists we crave attention, whilst hot blooded men are the voyeurs ... A stunning woman can command and takes pleasure in being noticed. Seems not too many understand what it means to hold and own props and get threatened by those who do. Banks are considered to be law abiding and & rather boring places yeah not true . A bank balance sheet will show capital is dwarfed by their liabilities this means when a portions of loans is falling its problems for the bank.
I’m finding it difficult to believe housing prices will plateau at all. I was expecting WA to be hit hit hard with the fall in mining expenditure, daily I read about mining services/companies laying of people but it doesn’t seem to have slowed things down a whit here. A mate of mine, mining engineer got laid of 3 months ago and has not even been able to apply for any equivalent jobs, they just are not advertised. His HR people tell him it could be a another 18 months before things pick up. In the meantime he is now going to sell a house he purchased 6 months, never moved into it and he is getting offers 300K above what he payed. Its just incredible, I just don’t understand it!
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