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!
It depends on the price range of properties, people are certainly looking & buying ......
I was looking at a home open a few weeks ago in to get an idea of what it was aiming to sell for.., a triplex development on a semi busy st 2 were under offer within a fortnight.....
Mining has slowed down but it seems not enough to cause too many housing negatives.....yeah well more rentals avail I got to say that..but it depends on location & price range of the rental rates.
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.
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.
yeah right, credit isn't money but you think gold is...
I am the love child of Tony Abbott and Pauline Hanson
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.
I'm pursuing this issue as a bit of an Aunt Sally but I think it's worthwhile.
I intended in the example to cover both the reserve and capital (eg tier 1/equity) regulation systems. I wrote that each bank had $10 reserve/equity to indicate that each bank met (just) the regulatory requirements whatever they were. I don't think it materially affects the issue I'm addressing whether they are reserve or capital restrained. In any case it appears that suitable ESA reserves even in Australia are mandatory for banks.
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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.
In the example I proposed no bank had surplus funds to lend. In your case (1), yes, the lending bank (say bank A) could try to encourage one of the 2 depositors with banks B and C to transfer their funds to bank A. But that simply conforms with the Count's assertion that the bank needs funds for lending and leaves the Count's assertion in tact. And as you say, the bank that loses the deposit (say bank B) then has a problem unless the loan from bank A gets deposited with bank B. Case (2) is simply a variation on case (1) where the loaning bank A hopes to get its loan back from the receiving bank. Implicit in it is that to be workable in my example, the loan issuing bank A has to assume before writing the loan that it will be able to get the loan money back from the bank which received the loan money. That would be imprudent in the extreme because, in my example, bank A would have to default on settlement if the receiving bank declined to return it as a loan to bank A.
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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.
I doubt that is automatic. In the example we have a bank issuing a loan without the necessary excess reserves with which to meet the obligations arising from the issuance of that loan. Under those circumstances the RBA could justifiably decline the request for a loan from such a bank.
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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.
That seems to be a long winded way of saying that a loan issuing bank will always be able to get the loan money returned to themselves as a loan. I don't accept that.
In practice, I accept that the banks collectively ensure that loans create deposits though that may not be true at an individual bank level. In the example I used, if each of the 3 banks simultaneously issued equal loans and those loans each went to different banks there would be no problem. But that would be a fluke and even then it doesn't contradict Count's assertion that bank's need funds for loans. The banks would then be getting funds for their loans.
The point I'm making is that it is glib to say that banks can simply issue loans willy nilly. They need to ensure that they will be able to meet the obligations arising from issuing those loans and that means they will need to obtain the funds required to meet those obligations. Apart from the RBA loan issue, those funds to meet loan obligations must already exist as surplus in the commercial banking system and be available.
yeah right, credit isn't money but you think gold is...
I don't know if this will get through that pea brain. In the banking system credit is cancelled out by debit. Fiat money circulating outside the central bank is canceled out by nothing (unless you burn it or bury it), it has an objective existence. Gold has an objective existence as well.
Bank lending is limited to the availability of excess reserves. There is no difficulty getting a loan if you have good credentials and represent a high quality loan to the bank. Everyday money is incoming from the loans being paid off, the bank virtually has to find new loans to replace the old ones being retired otherwise the bank will have to make the depositors come in to take their money back.
Funding is also limited by the term of the funding as well. If a bank could borrow enough money long term, 10 or 15 years then it has no problem using these funds for mortgage loans. But if the term of the deposit is only a few days, then this isn't suitable for mortgage loans.
But a bank cannot issue endless credit by creating unfunded liabilities, despite the claims of certain Youtube videos. A bank can borrow from the central bank to cover short term liabilities but in normal practice there are limits to the term of funding from central banks. If a hole grows in the banks funding then it has little choice but to start limiting new loan creation to rebalance its book.
During the GFC we didn't see the major banks get smoked because the riskier finance was being carried by the non bank lenders who did get smoked. In actual fact the opposite occurred, the major banks developed over-weaning excess reserves. These the RBA was forced to clear by assuming the risk and creating assets in the form of foreign reserves, lending to the government and lending to the lesser banks.
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!!!
But a bank cannot issue endless credit by creating unfunded liabilities, despite the claims of certain Youtube videos. A bank can borrow from the central bank to cover short term liabilities but in normal practice there are limits to the term of funding from central banks. If a hole grows in the banks funding then it has little choice but to start limiting new loan creation to rebalance its book.
I agree with this. Both overnight interbank lending and overnight (or even a bit longer) lending by the CB can be used to cover short term requirements arising from transients associated with a bank's new deposits being less than the total of a bank's new lending obligations plus deposit withdrawals.
But a bank cannot long term have its new deposits being less than its new lending plus deposit withdrawals. In this sense, loan obligations need to be supported by deposits - regardless of solvency. UK's Northern Rock bank was never at any time insolvent yet it ceased to be viable despite guarantees from the BOE. The public visibility that Northern Rock was having problems obtaining funds to continue to meet the obligations of its long term lending led depositors to withdraw their funds. Regardless of the balance sheet, banks lose viability in such circumstances.
I agree with this. Both overnight interbank lending and overnight (or even a bit longer) lending by the CB can be used to cover short term requirements arising from transients associated with a bank's new deposits being less than the total of a bank's new lending obligations plus deposit withdrawals.
But a bank cannot long term have its new deposits being less than its new lending plus deposit withdrawals. In this sense, loan obligations need to be supported by deposits - regardless of solvency.
Oh dear, then Australia's banks are in some trouble.
Oh wait, there's actually a market for banks to issue beyond-overnight paper on the wholesale market, potentially even in foreign currencies. Some might call these mysterious instruments "bonds".
Oh dear, then Australia's banks are in some trouble.
Oh wait, there's actually a market for banks to issue beyond-overnight paper on the wholesale market, potentially even in foreign currencies. Some might call these mysterious instruments "bonds".
Who knew?
Funds to meet AUD loan obligations which are raised by banks through bond issues must be in AUD or be converted into AUD. Those AUD must already exist in the Australian banking system. Any AUD raised by one bank in that way simply come from deposits placed with another bank. From the bond issuing bank's point of view the funds raised by bond issuing are identical to term deposits. The only difference is that a bond can be traded whereas a term deposit cannot, but that is irrelevant to the issuer of the bond. Banks issuing bonds, even overseas, is simply an example of banks competing for existing deposits to support the loans they are issuing. Such bond issuance leaves the effective total of AUD deposits in the banking system unchanged. Or does it?
That seems to be a long winded way of saying that a loan issuing bank will always be able to get the loan money returned to themselves as a loan. I don't accept that.
Perhaps "long winded", although the point of the "long winded" explanation was to walk through the mechanics based on your example.
Re accepting the point, think of it another way - what happens when the loan funds *are* deposited back into the same bank that originated the loan? Other than any future (and likely incremental) demands for some of that deposit (ATM/EFTPOS/cash withdrawals etc), the originating bank will have *immediate* demand from those funds that is far less than the full loan amount. Which means they don't need to have anywhere near the full amount available in current reserves from day one to fund the loan in that case.
Then extrapolate the above to a far larger, more complex system, with millions of transactions a day. The funding requirements are driven by the *net* demands on any particular bank, and day-to-day the net amount is always less than the potential gross amount based on the total loans written that day. The banks simply do this everyday, and they do borrow any net reserve shortfall or lend any excess on the over-night market every day - the RBA interest rate system ensures they will do this - this balances the whole system out, and helps maintain "financial stability".
The whole system works because most of the time most of the money is left in a deposit account somewhere in the banking system - even if the money is spent. It's only cash withdrawals that create an actual "physical" requirement to fund the transaction with reserves - in all other cases, the money *will* be availabe back to you on the over-night market - it's not a risk (other than a liquidity risk as we saw in the US after the Lehmans collapse - that's why this was such a big problem and all US lending basically haulted, regardless of reserve levels and credit-worthiness of wanna-be-borrowers).
PS: Blackrocks problem, and the problem in any bank run scenario, is that the other banks stop lending on the over-night market when this situation occurs - confidence gone, the music stops, the bank being run is unable to settle demands for funds and it's gone, just like that. Add to this Sober's point about other funding avenues such as bond/MBS issuance etc - same situation; if no-one will buy your securities - funding stops, bank screwed.
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In practice, I accept that the banks collectively ensure that loans create deposits though that may not be true at an individual bank level. In the example I used, if each of the 3 banks simultaneously issued equal loans and those loans each went to different banks there would be no problem. But that would be a fluke and even then it doesn't contradict Count's assertion that bank's need funds for loans. The banks would then be getting funds for their loans.
A fluke in your scenario perhaps, but at the scale we actually operate at, for a large proportion of funds this is exactly the outcome that occurs on a day-day basis. Only the net discrepancies need to be funded somehow each day, which is always an amount significantly less than the total of any loans written that day.
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The point I'm making is that it is glib to say that banks can simply issue loans willy nilly. They need to ensure that they will be able to meet the obligations arising from issuing those loans and that means they will need to obtain the funds required to meet those obligations. Apart from the RBA loan issue, those funds to meet loan obligations must already exist as surplus in the commercial banking system and be available.
I agree with this to a point - funding is important yes, from an operational perspective. But the loans will be written if a) there is room to based on the capital adequacy requirements and b) there are credit worthy borrowers asking for loans. The net operational funding requirements each day will be met as described earlier.
Another point - if it does work the way you are now suggesting (along with The Count), how then do you think the aggregrate money supply grows? It's chicken and egg your way isn't it?
Perhaps "long winded", although the point of the "long winded" explanation was to walk through the mechanics based on your example.
Re accepting the point, think of it another way - what happens when the loan funds *are* deposited back into the same bank that originated the loan? Other than any future (and likely incremental) demands for some of that deposit (ATM/EFTPOS/cash withdrawals etc), the originating bank will have *immediate* demand from those funds that is far less than the full loan amount. Which means they don't need to have anywhere near the full amount available in current reserves from day one to fund the loan in that case.
Then extrapolate the above to a far larger, more complex system, with millions of transactions a day. The funding requirements are driven by the *net* demands on any particular bank, and day-to-day the net amount is always less than the potential gross amount based on the total loans written that day. The banks simply do this everyday, and they do borrow any net reserve shortfall or lend any excess on the over-night market every day - the RBA interest rate system ensures they will do this - this balances the whole system out, and helps maintain "financial stability".
The whole system works because most of the time most of the money is left in a deposit account somewhere in the banking system - even if the money is spent. It's only cash withdrawals that create an actual "physical" requirement to fund the transaction with reserves - in all other cases, the money *will* be availabe back to you on the over-night market - it's not a risk (other than a liquidity risk as we saw in the US after the Lehmans collapse - that's why this was such a big problem and all US lending basically haulted, regardless of reserve levels and credit-worthiness of wanna-be-borrowers).
PS: Blackrocks problem, and the problem in any bank run scenario, is that the other banks stop lending on the over-night market when this situation occurs - confidence gone, the music stops, the bank being run is unable to settle demands for funds and it's gone, just like that. Add to this Sober's point about other funding avenues such as bond/MBS issuance etc - same situation; if no-one will buy your securities - funding stops, bank screwed.
A fluke in your scenario perhaps, but at the scale we actually operate at, for a large proportion of funds this is exactly the outcome that occurs on a day-day basis. Only the net discrepancies need to be funded somehow each day, with is always an amount significantly less than the total of any loans written that day.
I agree with this to a point - funding is important yes, from an operational perspective. But the loans will be written if a) there is room to based on the capital adequacy requirements and b) there are credit worthy borrowers asking for loans. The net operational funding requirements each day will be met as described earlier.
Another point - if it does work the way you are now suggesting (along with The Count), how then do you think the aggregrate money supply grows? It's chicken and egg your way isn't it?
I don't disagree with what you have written concerning loans coming back to the issuing bank and banks receiving a steady daily inflow of funds in the form of new deposits which can to some extant be anticipated and relied upon to support loan issuance. However, problems can arise when the steady long term outflow (loans plus withdrawn deposits) exceeds the steady long term inflow (new deposits). You reckon that banks will always be able to cover the difference via overnight interbank lending, RBA overnight lending or longer term bond issuance. This may not always be possible. Interbank loans and bonds issues represent attempts to obtain surplus funds from each other. There may be no surplus funds and every bank may need all the deposits they have. If the only recourse of banks is to get the CB to create them some new money then the shit is already hitting the fan.
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