Re: Non-Banks versus Banks
From: The Trucker (mikcob_at_verizon.net)
Date: 07/28/04
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Date: Wed, 28 Jul 2004 08:55:00 -0700
William F Hummel wrote:
> On Fri, 23 Jul 2004 09:39:50 -0700, The Trucker <mikcob@verizon.net>
> wrote:
>
>>William F Hummel wrote:
>>>
>>> Well, you've still got it wrong. The total loans issued by banks far
>>> exceeds those currently existing as demand deposits. The reserve
>>> ratio requirement applies only to demand deposits. There is no
>>> reserve requirement on savings deposits or term deposits.
>>
>>Quite right! Maybe "far exceeds" is measured as about 10 times.
>>That would be the "reserve requirement".
>
> Wrong. The ratio of total loans to total reserves in the banking
> system bears no relation to the reserve ratio requirement. Total
> loans correspond to M3 (less money market funds), currently about
> $7,250 billion. Total reserves are about $60 billion, for a ratio of
> about 120:1.
Then the reserve requirements are not a limiting factor and we are
back to 12.5 multiplier as the only restraint on bank lending. But
that can't be true either, can it? Why would total loans correspond
to M3? But wait! I see it! ALL MONEY IS CREATED VIA BANK LOANS.
And M3 = all the money (you don't count the Treasuries and such).
And if that is true then are you saying that the banks actually
do create their own reserves. i.e. all the "savings deposits and
term deposits" are loaned money gone to ground. Some portion
of these funds will be deposited at the Fed as "reserves".
> The reserve ratio requirement applies only to demand deposits and
> "other checkable deposits" which currently total about $600 billion.
> New bank loans create demand deposits, but over time they move into
> savings deposits and term deposits for which there is no reserve
> requirement.
Again. We are back to a 12.5 multiplier.
>>> Reserves move among banks as a result of the checking activity of
>>> depositors. But the notion that a huge loss of loss of reserves
>>> resulting from something like a $10B loan would soon be restored by
>>> ordinary checking activity is absurd. Banks suffering a significant
>>> loss of reserves must promptly borrow to replace the lost reserves.
>>> That's why there is a very active Fed funds market.
>>
>>Suppose we use $100K as a typical deposit and $1M as a typical loan
>>amount. Suppose that all the banks lend an amount on this order
>>in a given day. All I am saying is that the "cashing" of the loans
>>is distributed among the banks. A representative bank will lose $1M
>>on the cashing of its loan and gain $1M as some other bank's cashed
>>loans are deposited at this representative bank. Why do we need to
>>borrow???? We lost $1M and we received $1M.
>
> This scenario is a far cry from the one you started with, when you
> claimed a $1B deposit would allow a bank to immediately lend $10B.
That claim still stands. According to all the rules you have
defined that bank that received a deposit of $1B could, in fact,
lend $10B.
> Most banks have more than enough reserves to cover checks against a
> $1M loan, so they can lend amounts like that and borrow the $1M after
> the fact.
It seems to me that "savings and time deposits" at the bank will more
than cover any shortfall. The bank simply moves some of the money
in these "time deposits and savings" to the Fed as "reserves" and
"covers" any immediate withdrawals in the same way.
> But there is no assurance that ordinary checking activities
> in the banking system will bring new deposits to the bank in time to
> cover that $1M shortage in reserves within the 14 day averaging
> period.
True... But the system as a whole **_WILL_** operate in exactly
that fashion.
> Banks assume that any fairly large loan will have to be covered by
> borrowing in the Fed funds or money market if its current reserves
> just cover existing deposits. Most banks hold T-bills as secondary
> reserves, and alternatively they could sell T-bills to acquire the
> funds necessary to meet the reserve requirement.
We have no real disagreement here.
>>
>>When small banks try to play "catch up" with big banks this may not
>>work. They may create too many loans or too large a loan and their
>>small bank simply does not attract enough deposits from loans created
>>at other banks. They are then forced to borrow. Or in the course of
>>banking some are more successful than others and in this case the
>>more successful will swallow the less or the smaller bank will "sell"
>>loans to the bigger banks that would not need to borrow. This
>>"borrowing" needs to be averted when possible as it is a cost of
>>lending.
>
> As a general rule, small banks have more depositor's money than they
> can find good use for in lending. Consequently small banks tend to
> lend their excess reserves to a larger bank, usually a correspondent
> bank that provides check clearing services for them.
Perhaps this is the case and perhaps not. It does not matter. I
was trying to create a scenario in which this "borrowing" (of something
other than the 10% reserves) was actually necessary. It would
appear that unless a loan is huge then such borrowing is seldom
necessary.
>>
>>If a bank is allowed to create loans an an amount 12.5 times the
>>amount of "capital" it owns then the "borrowing" in the banking
>>system would seem to be of short duration and based on the
>>difference between the "capital" requirements constraint and the
>>"reserve" requirements constraint. In any event, it would seem
>>that the amount of borrowing is more often than not limited
>>to the borrowing of 10% or less of the amount of the loans.
>>Fractional reserve banking is somewhat like check kiting but it
>>is legal and probably quite necessary. My objection is to the
>>amount of "interest" (RENT) that is collected by the banks through
>>this leveraging.
>
> This myopic view seems to be pretty standard among those who don't
> really understand banking. You make a leveraged bet any time you make
> an unsecured loan. Banks do too, and at their own peril. If you make
> a loan, you normally expect some sort of "fee for service" over and
> above the return of principal. Banks do too, and charge "interest"
> which is simply a fee paid incrementally.
I am of the opinion that my "view" is NOT myopic in spite of your
aristocratic prancing to the contrary.
You are quite right in classifying the loans as a leveraged "bet".
Also quite justified in the defense of operating costs being covered
by a "finance charge" (something that is now lumped in with "interest").
The original charge and the current charge is that the banks are
collecting "interest" not at the difference between the charge assessed
on loans and the charge paid fore "borrowed" funds, but at 10 to 12.5
to even 25 times that difference. I have shown how this is done
and yet you continue to simply ignore the facts.
> Banks appear to create money out of nothing, which drives some people
> crazy.
Not me!
http://GreaterVoice.org/econ/credit.php
I simply have a very big disagreement with the amount of rent
that currently flows to banks.
> But on balance, banks can only lend what they borrow, and that
> places them at risk for the amount borrowed.
This is our bone of contention and I have seen NOTHING from you
other than "daddy says so" to refute my position on the fact that
capital adequacy and reserve requirements limit the MULTIPLE of
how much banks can get from leveraging their capital/deposits,
but that the banks DO typically lend a multiple of what they
have and they do NOT normally need to borrow. You can say that
they must pay interest to those who have term deposits and passbook
accounts but that is NOT leveraged and is a more or less fixed
cost.
> Even in those countries
> like Canada that have no reserve requirement, banks must borrow in
> order to cover their loans.
No doubt. There are times when too many will come for the money that,
by the definition of banking, is not really there.
> Whenever a bank issues a loan, it is on
> the hook to cover that loan with base money on demand.
Yep.
> It can't
> produce base money itself so it must borrow base money, known as
> reserves in the banking system.
IF NECESSARY!!!!!!!!!!!!!!!
> Banks place their owner's capital at risk whenever they lend. Poor
> lending practices or a contracting economy drive many into bankruptcy.
True again!
> Money lending is a very competitive business, and banks must compete
> with non-bank lenders of all sorts. In fact banks account for only
> about 20% of the total credit market debt.
I have some real difficulty with this claim. Difficult to imagine how
an entity that creates money out of thin air would not be very competitive
with an entity that must actually pay full toll for the use of money.
> Most of the interest banks
> earn on their lending flows right back to the non-bank community as
> salaries, rent, supplies, utilities, insurance, dividends, and
> uncollectable loans. The return on assets of a healthy bank in a good
> year is typically in the range of only 1% to 2%.
Good grief: "dividends" and uncollectable loans are the soul of the
banking profession as well as the exporbitant salaries paid to the
bank officers. The profits (rent) from a bank are delivered in many
different ways.
-- http://GreaterVoice.org (a work in progress)
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