Re: Non-Banks versus Banks

From: The Trucker (mikcob_at_verizon.net)
Date: 07/22/04 

Date: Thu, 22 Jul 2004 13:02:44 -0700

William F Hummel wrote:

> On Thu, 22 Jul 2004 10:25:51 -0700, Mike Coburn wrote:
>
>>William F Hummel wrote:
>>
>>> Coburn would have us believe that when a bank receives a new deposit
>>> of $1B, it can immediately lend $10B. In the above example, that
>>> would leave the bank $8B short of what it needs to cover checks
>>> written against the loan. Absurd on its face.
>>
>>So in the 10 seconds before the loan is granted the bank borrows
>>the $8B and does the deal, or the bank does the deal and then 10
>>seconds later borrows the $8B. I have never DEPENDED on this
>>after loan borrowing to make my case though I think it quite
>>realistic. I have said only that EVEN IF THE BANK ACTUALLY HAD
>>TO BORROW to make the loan then the bank would, and does, in fact
>>borrow so as to cover the loan.
>>
>>My major point has been made and not once rebutted by you that
>>the FRACTIONAL RESERVE SYSTEM allows banks to routinely support
>>loans with only a fraction of the money (10%) ON HAND.
>
> Coburn, there is no ducking what you said. It's on the record, and
> here are a couple of statements showing what you actually said.
>
> (1) "This notion that a bank must have the dough that it lends BEFORE
> it can lend is total horse manure. Due to the ability of the bank to
> borrow whatever it might need at a discount, banks can routinely loan
> what they do not have."

There is little (if anything) wrong with this statement. But let us
assume that I am incorrect in my assertion that the banks can grant
a loan for $10B and then, ten seconds later, borrow $9B in the
money market or at the discount window or whatever. The FACT remains
that the bank COULD, IF NECESSARY, borrow the funds it will be lending
and mark up the interest rate so as to profit. That is NOT a larcenous
thing to do. It is merely a business deal. It is a question of
HOW MUCH.

> (2) "That $1B deposit just gave this bank the ability to create $10B
> in new loans so long as the real assets of the bank (paid in capital)
> will stand up to the 10 to 1 requirement on bank assets."
>
> Both of the statements are nonsense, and show that your understanding
> of money and banking is third rate, at best.

These statements are based on what you have said are the "constraints"
on loans made by the banks. They are taken DIRECTLY from your own
posts.

> In the first statement, your claim that a bank may lend BEFORE it has
> the dough is total horse manure (to borrow your own phrase). Only if
> it has sufficient reserves to cover the loan BEFORE it issues the loan
> would that be feasible.

For sake of argument I am going to release this claim. It is not necessary
to the real thesis. The bank can borrow 10 seconds before or ten seconds
AFTER the NOTE (the asset) is signed by the borrower. The bank has
AT LEAST until the end of the business day to "cover" the funds. By law
it may have to borrow a few seconds before the NOTE is signed. In any
case, the bank will, at minimum, have until the end of the business
day to satisfy the "cashing" of the loan and to do the borrowing.

> Also banks can borrow at the discount window only at a penalty rate of
> at least one percentage point. The notion that banks borrow at the
> discount window in order to acquire funds to lend is silly. They can
> borrow funds cheaper in the money market.

I do not recall _EVER_ saying that banks borrow at the discount window.
They borrow at a discount from what the general public would pay. That
discount may well be a difference in short versus long term intertest
rates. But it is a discount nonetheless. And that difference is the
base (unexpanded by fractional reserve) profit of the bank.

> In the second statement, you have confused the capital adequacy
> requirement with the reserve ratio requirement. The 10:1 ratio
> applies to the reserve requirement, in particular to the ratio of
> demand deposits to reserves. Reserves are the same as a bank's
> capital.

I am not the least bit confused on this issue. But it seems that
you are now arguing with yourself. While paid in capital of the
bank will most certainly be reserves in the vault of the bank
or held at the Fed, that does not imply that reserves are limited
to the paid in capital of this bank or that aggregate reserves are
limited (and equal) to the paid in capital of all banks. So
"Reserves are the same as a bank's capital" would seem to be a
drastic misstatement. When the Fed buys securities, that money
adds to RESERVES. That money is not part of the paid
in capital of the banks unless all those securities are owned
outright by the banks as opposed to owned by the bank's depositors
(the participants in the "money market").

> Also the capital adequacy requirement refers to the minimum allowable
> ratio of the bank's capital (assets - liabilities) to its
> risk-weighted assets. That requirement is 8%.

I am not going to bother to reinstate YOUR post that says bank a
can loan 25 times its paid in capital. We both know it and that
is that.

>
> As for your fast switch to the subject of FRACTIONAL RESERVE BANKING,
> there is nothing to refute. No one denies we have a fractional
> reserve banking system. The problem is you don't understand it.

I seem to understand it quite well. The banking system as a whole,
and each independent bank can create loans in an amount equal to
10 times the REAL money they actually have in their "vault" or
"on deposit" at the Fed. Since the bank(s) can create loans/money
at a rate of 25 times their actual capital then the Fed will be
constantly adding money to the system to keep pace with the lending
and then selling bonds to retire any excess money money that might
cause a deterioration in interest rates.

The money/credit created by bank lending does not escape the banking
system but rarely. Thus, the cashed loans CIRCULATE among the banks
and there is no real need to _BORROW_ the actual amount of a loan
but perhaps for a very short period. The "borrowing" is, after the
initial creation/cashing period, limited to the borrowing of only
10% of the loan so as to provide the RESERVES for the loan.

I cannot fathom WHY you are so intent on denying this obvious fact. 

-- 
http://GreaterVoice.org (a work in progress)

Relevant Pages

  • Re: Non-Banks versus Banks
    ... >> reserves which just meets the 10% reserve ratio requirement. ... >> If the bank then issues a loan of $10B, the bank must assume it will ... The borrower is not going to leave that $10B on deposit. ...
    (sci.econ)
  • Re: Money Supply, Credit Supply
    ... provide loans as required until the problems were solved. ... >> Banks are not constrained in lending by the lack of reserves. ... >> borrow the funds in the money market, or in a pinch from the Fed. ... >If the bank borrows from the Fed, will it be borrowing from a discount ...
    (sci.econ)
  • Re: Non-Banks versus Banks
    ... After the loan is ... However the bank could lend more than $1 billion ... It can acquire the needed reserves by borrowing in the money ... There are N banks in the banking system. ...
    (sci.econ)
  • Re: Money Supply, Credit Supply
    ... Now the central bank buys government debt. ... > Banks are not constrained in lending by the lack of reserves. ... > borrow the funds in the money market, or in a pinch from the Fed. ... Is there any way for the bank to make loans in the amount of 20X, ...
    (sci.econ)
  • Re: Non-Banks versus Banks
    ... >> simply equal to the amount of that deposit. ... >additional reserves. ... >bank determine the amount of loans it can create. ... If the bank then issues a loan of $10B, the bank must assume it will ...
    (sci.econ)