Fallacies about the banks

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alb
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Oct 1 2012 10:03
Fallacies about the banks

Anyone who has followed the Occupy Movement will know how many of those involved blame just the banks and that this has opened the door for all sorts of currency cranks and money bugs. Obviously, everybody here knows that mere banking or money reform is not going to make any basic difference to the way the capitalist economy works, but we still need to take on and refute these theories.

Here are two attempts to do so from a Marxian perspective:

http://www.metamute.org/editorial/articles/john-maynard-nothing

http://www.worldsocialism.org/spgb/socialist-standard/2010s/2012/no-1298-october-2012

mikus
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Oct 1 2012 17:10

(Shamelessly self-promotion) I gave a talk on this topic a few years back, which you can read here: http://libcom.org/library/fictitious-capital-new-fangled-schemes-public-credit

alb
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Oct 2 2012 08:31

Good article. But of course banks' dealing in "fictitious capital" (capitalised future income streams) is not the same as banks lending real savings. Fictitious capital and bank credit are not the same, not that you suggested they were.

More on Marx's writings on finance here.

Noa Rodman
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Dec 18 2012 19:05

Some simple facts against the currency cranks (Bloomberg).

Quote:
Deposits at U.S. banks exceed loans by an unprecedented $2 trillion as the threat of a slowing economy tempers borrower demand and lenders preserve tightened standards.

Cash deposited at firms from JPMorgan Chase & Co. to Bank of America Corp. expanded 8.7 percent this year to a record $9.17 trillion through Dec. 5, Federal Reserve data show. That outpaced a 3.7 percent gain in loan assets to $7.17 trillion. The gap between what banks take in and lend out has surged since October 2008, the month after Lehman Brothers Holdings Inc. collapsed, when loans exceeded deposits by $205 billion.

...
The banking industry is lending 78 cents for every $1 it holds in deposits, below the mid-90 percent range cited by Cassidy as “optimal.”

In-depth discussion of several leading easy money advocates here

Noa Rodman
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Dec 18 2012 19:14

In other news:

http://www.huffingtonpost.co.uk/2012/12/18/queen-asks-george-osborne-gold_n_2321666.html

There's some conspiracy mongering around it, but I think with the fact that historically the price of gold was openly "manipulated", it be might be interesting to look at the role of gold lending by central banks (which is undisputed) in the price of gold or the value of currencies.

Spikymike
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Jan 3 2016 17:11

Perhaps worth adding another useful contribution from alb here regarding the recent Bank of England/Financial Conduct Authority report on the 2008 failure of the UK HBOS bank:
www.worldsocialism.org/spgb/socialist-standard/2010s/2016/no-1337-january-2016/hbos-horse-bolted

Noa Rodman
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Sep 2 2016 23:56

"a graph that shows the result when we subtract loans and leases from deposits:"

some blogger wrote:
For the years between 1975 and mid-2008, bank deposits exceeded lending by an average of $205 billion.
Noa Rodman
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Sep 10 2016 15:27

^the above graph was to counter the claim that banks can create more loans than their deposits. The two points of exception (the dates just after 2001, and around the 2008 crisis) when the amount of total loans exceeds deposits, would require some explanation by a more detailed look into the balance sheets.
--

Just to again correct a smaller mistake, but an outrageous one, made by Hillel Ticktin and repeated every time (eg in this lecture of the CPGB summer school: https://www.youtube.com/watch?v=7uE74NjDIy8) of a supposed staggering 27 trillions of dollars parked (ie not invested) at the Bank of NY Mellon. Hillel's point is about money not being invested, but I think his example is clearly wrong. I found that:

On the balance sheet of the Bank of New York Mellon total deposits for 2012 amount to 'only' about $246 billion:
http://www.bnymellon.com/investorrelations/annualreport/

The figure of $27 trillion refers to “Assets under custody or administration (AUA)”, which isn’t exclusively cash. It’s likely also much stocks (and as the Dow Jones from 2002 to 2008 almost doubled, and since collapse again recovered, the AUA would follow). The annual growth of AUA at BNY Mellon hasn’t accelerated compared to before the crisis (looking back prior to the merger of Mellon with the bank of New York in late 2006, to their combined AUA), see 2007 report page 4 (chart shows growth from something under $10 in 2002 to $23 trillion in 2007). The year of crisis 2008 saw a decrease to $20.2 trillion. 2009 (22.3 trillion) still no full recovery to the 2007 figure. 2010 growth to 25 trillion, 2012 lists 26.2 trillion. That is slower compared to the (hypothetically combined) growth before 2007. So I think Ticktin’s mention of $27 trillion should be seen as referring to the increased amount of AUA since the early 2000s. And as I mentioned the stock market increased about the same rate, so this growth is probably not mostly due to cash which is “deposited”.

S. Artesian
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Sep 10 2016 17:00

Noa,

Check the FDIC statistics "archived industry trends" at https://www.fdic.gov/bank/statistical/stats/

The data in this series starts in 2001, and for 2001-2008, commercial bank and savings institutions loans exceed domestic deposits.

Of course, banks can lend more money than they take in in deposits, just as a corporation can spend more on production than it takes in in revenue by issuing short-term debt (commercial paper) and long term debt (bonds).

As for Ticktin, nobody has 27 trillion in cash assets on hand, not the People's Bank of China, not BOJ, not JP Morgan Chase, not Apple, or Exxon, not anybody.

Noa Rodman
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Sep 10 2016 19:00

Indeed that link shows a (slight) excess of loans over deposits, but I think more complete (because include perhaps also non-insured deposits) are the figures that I base myself on:
Assets and Liabilities of Commercial Banks in the United States
http://www.federalreserve.gov/releases/h8/

eg 21 December 2005: http://www.federalreserve.gov/releases/h8/20051230/

It shows item 5 (Loans and leases in bank credit) is below item 17 (Deposits), respectively $ 5,445.2 billion vs. $ 5,747.3 billion.

Perhaps the difference with the FDIC figure is because that loans are more often insured than deposits?

S. Artesian
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Sep 10 2016 21:20

FDIC doesn't insure loans; it only insures deposits.

Noa Rodman
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Sep 12 2016 07:28

There must be a difference in the way that banks report their figures to the Federal Reserve and to the FDIC, but I get a literal headache trying to figure out what accounts for that difference. I hope it's not dyslexia.

S. Artesian
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Sep 12 2016 15:37

Noa,

When you say banks can't loan more than they have on deposit, do you mean banks are prohibited from doing so by statute, or by the "economic laws" inherent in capitalism?

I know of no statutory requirements that tie loans/assets to deposits.

Noa Rodman
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Sep 12 2016 18:44

I think we can abstract from inter-bank loans (because basically that's borrowing another bank's deposits to be able to extend more loans than the bank itself has on deposit).

I'm opposing the claim of that group of economists (eg Richard Werner, Randall Wray, probably also Steve Keen, etc. - in German there is Mathias Binswanger, etc. as listed here), which as I understand it, says that bank create money out of nothing.

It would be helpful if someone can find figures of British (or other country) total loans vs deposits to see whether there can be more loans than deposits (again, in total). If there is no such evidence, than I think it's an easy refutation of the fallacy that banks create money out of nothing.

S. Artesian
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Sep 12 2016 21:22

Banks don't create money out of nothing, anymore. Central banks authorize the printing of money. Back in the day when banks issued their own scrip, they were issuing promissory notes.

Banks don't issue loans based on the amount of money deposited in the bank. They make loans on the basis of their own access to capital markets-- i.e. debt.

Banks have issued about 15.3 trillion in bank debt. That amount certainly exceeds amounts on deposit by at least a factor of 5 and probably closer to 10.

alb
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Sep 13 2016 09:01
S. Artesian wrote:
Banks don't issue loans based on the amount of money deposited in the bank. They make loans on the basis of their own access to capital markets-- i.e. debt.

Actually, they make them from both, i.e. both deposits (from outside) and from what they themselves borrow from the money market. So, while it is true, that banks are not restricted to what they can lend by the amount that has been deposited with them, this does not mean that they can create what they lend out of nothing. If they lend more than their deposits they have to have obtained the money elsewhere.

There is a measure of this -- the loan to deposit ratio which is a measure of how much a bank depends (or not) on borrowing rather than deposits for making loans.

Noa Rodman
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Sep 14 2016 07:15

Simple question; prior to the bank's reliance on capital market funding, where was that (capital market's) money originally located, and was it doing nothing? It seems the assumption made (by Artesian and Alb) is, that it was not on deposit at a bank.

So did the money come from under the capital market's mattress?

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spacious
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Sep 14 2016 13:05

http://www.metamute.org/editorial/articles/john-maynard-nothing

On a related note, if any of you want to comment, this article on Mute makes an argument about "monetary reformism", the idea that it is primarily the system of money creation which needs to be fixed to bring a just society into being, and/or that the current crisis is a result of 'evil banks producing money from nothing'.

Intuitively I am swayed by the author's argument against this fairly widespread but non-radical idea, but my econometric, how banks-really-do-it knowledge isn't that fancy, so I might be wrong.

On a more complex level, I'm also curious how this argument is related to that of fictitious capital as used by Marx, as the multiplication of titles to wealth, which circulate as value, are bought and sold but in fact are only future claims on the wealth actually produced. As the heaping up of unrealizable claims to wealth it is one of the sources of systemic instability, creating both winners and losers among value-owners, but I am not at all sure how the processes which give rise to 'monetary reformism' type of ideas relate to this concept in all its depth.

As alb says, fictitious capital and bank credit are not the same, but I wonder how they relate on the banks balances, assuming that an unknown portion of any large capitalist company's accounted possessions consists of fictitious value. Can the paper value of these possessions serve as the backing for credit which a bank gives out to its clients? In short, do the values of wealth titles figure as 'real wealth' which banks use to back up new credit issuance? Or is there some more limited basis for credit issuance? If the first is the case, they would be handing out credit on the basis of value which might be swept out from under them, so the alleged nothing on which credit is based is something real, ie. is still recognised as representing real value, and used as such in sober accounting as dependable guarantee of future income. On the other hand, it is a claim to wealth which is not recognized as possibly partly fictitious, so the backing for the credit is also partly lacking.

Don't hesitate to tell me if I'm completely out in the woods with this attempt, of course. smile

S. Artesian
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Sep 14 2016 14:09
Noa Rodman wrote:
Simple question; prior to the bank's reliance on capital market funding, where was that (capital market's) money originally located, and was it doing nothing? It seems the assumption made (by Artesian and Alb) is, that it was not on deposit at a bank.

So did the money come from under the capital market's mattress?

I don't assume anything. You argued that banks "can't" lend more than they have on deposit. What is the origin of the "can't"? Statutory or market?

Why can't a bank lend more than it has on deposit? That's the issue requiring clarification. The graph you produce shows, for a period, loans exceeding deposits, so clearly there's no statutory prohibition.

And market "prohibitions" are just that-- market, and therefore mutable, cyclical, contradictory.

That loans are usually less than deposits isn't the issue.

You might as well be arguing that a corporation can't spend more than its cash and cash-type assets on hand.

As for creating "money out of nothing.." nobody claimed that. But money can be created by leveraging assets, earnings, cash flows, and leverage to ratios of 30:1 as occurred prior to the 2008 contraction. Remember MBS? ABS? CDO? CLO? Structured Investment Vehicle? Off-Balance Sheet entities? etc. etc.

Not to mention, do you mean commercial banks, investment banks, savings banks?

Noa Rodman
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Sep 14 2016 17:25

I mean total banking industry of a country Artesian (to repeat myself). Indeed for two periods that I mentioned the total loans exceed deposits in the US (would be nice to find these figures going back decades for other countries too), and that I need to explain (2008 perhaps related to crisis, but there's also the period 2001ish).

The question spacious asks I think is whether in fact "money can be created by leveraging assets" etc. like you say. They can create these credit instruments, but I think the banks sold them to others on the market precisely to get money (i.e. that money to buy the assets is not created by them). I don't think fictitious capital can be discounted by today's commercial banks to issue credit money/banknotes (spacious put the finger on the question).

alb
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Sep 15 2016 06:19
Noa Rodman wrote:
Simple question; prior to the bank's reliance on capital market funding, where was that (capital market's) money originally located, and was it doing nothing? It seems the assumption made (by Artesian and Alb) is, that it was not on deposit at a bank.
So did the money come from under the capital market's mattress?

In the end of course it came from profits made by capitalist enterprises in the real economy (created by the unpaid labour of the workers). The point is that it does not matter where it came from, but that it is there and is available for banks to borrow and relend at a higher rate of interest. That's what banks do: borrow money at one rate of interest and relend it at a higher rate. Deposits to a bank are in effect (and in law) a loan from the depositor to the bank.

S. Artesian wrote:
As for creating "money out of nothing.." nobody claimed that. But money can be created by leveraging assets, earnings, cash flows, and leverage to ratios of 30:1 as occurred prior to the 2008 contraction. Remember MBS? ABS? CDO? CLO? Structured Investment Vehicle? Off-Balance Sheet entities? etc. etc.

The word "created" here is ambiguous. Banks can and do engage in these activities as well as their core activity of borrowing to relend and they do "make money" out of this in the sense such speculative activities generate an income for them. But this is not "creating money" in the sense that is usually used in discussions about whether or not banks can "create money" out of nothing. Also, of course, to engage in such activities banks already have to have the money, whether from their capital, the money market or even their depositors.

Noa Rodman
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Sep 15 2016 07:05

But you seem to think that the capital market keeps its money (that can be made available for banks to borrow) stored somewhere outside the banking system prior to when the banking sector actually applies for capital market funding. So this money wasn't yet on deposit at the banks (which as you say is in effect a loan of the depositor to the bank), according to your assumption. So I'm asking not where the capital market gets its money, but where does it store it, prior to when it lends it to banks?

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Cooked
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Sep 15 2016 16:17

What about that bank of England paper arguing that private banks do indeed create money by lending? Also that banks only have 3% coverage of their loans. (Sweden) these are figures and arguments basically pulled out of my arse but I have vague recollections that they are from mainstream *reputable" sources.

I know nothing and don't really follow this stuff but I've definitely read things along these lines.

S. Artesian
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Sep 15 2016 16:53
Quote:
The question spacious asks I think is whether in fact "money can be created by leveraging assets" etc. like you say. They can create these credit instruments, but I think the banks sold them to others on the market precisely to get money (i.e. that money to buy the assets is not created by them). I don't think fictitious capital can be discounted by today's commercial banks to issue credit money/banknotes (spacious put the finger on the question).

All these instruments are created with one purpose--- to be exchanged for money. They seek some sort of realization as money. So whether or not the banks, or any financial institution, including life insurance companies, brokers, etc. "create" money is immaterial. They are creating instruments of exchange. Out of nothing? Yes and no-- that is to say the instruments always have either a direct, or an indirect link to some sort of asset or both, even if the asset is simply, or most particularly, the general direction of the economy. Letters of credit, notes, bonds, asset backed securities, can themselves be exchanged in secondary markets for cash.

The instruments of credit can and do function as money.

So, for example, the notes, leases, bonds secured by container ships, and container shipping rates are no more "fictitious" than the container ships and container shipping rates themselves. Do container ships make "money out of nothing"? Of course not, but when the ships fail to make money period, then their capital value is dramatically depreciated, as is the case with the price of container ships today vs. 2007. Does that make the capital embodied in a container ship "fictitious." Of course not. It means capital has devalued itself.

The entire issue of "fictitious capital" has been given much more importance than the role "fictitious capital" actually plays in the accumulation, or disaccumulation, process.

Noa Rodman
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Sep 15 2016 17:39

Thanks for the clarification. If the money-ex-nihilo-camp were only to claim that financial institutions create credit instruments, specifically like a letter of credit, that would be stating the obivous. As I understand it their claim is however that commercial banks create cash, base money.

ajjohnstone
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Sep 16 2016 08:19

Cooked

Quote:
What about that bank of England paper arguing that private banks do indeed create money by lending?

People often seize upon things that appear to confirm their already held views. Graeber certainly did so.

Try this thread
http://libcom.org/forums/theory/has-david-graeber-become-currency-crank-22032014?page=2#comment-536963

Here is an article describing what the B of E actually said
http://www.worldsocialism.org/spgb/socialist-standard/2010s/2014/no-1317-may-2014/cooking-books-harry-graeber-and-magic-wand

Quote:
“banks do not act simply as intermediaries, lending out deposits that savers place with them
Many seem to have ignored the word "simply" as well as this passage in the article which explains that banks must have or get the funds to back up their lending, even if these don't all come from deposits that savers place with them:

Figure 1 showed how, for the aggregate banking sector, loans are initially created with matching deposits. But that does not mean that any given individual bank can freely lend and create money without limit. That is because banks have to be able to lend profitably in a competitive market, and ensure that they adequately manage the risks associated with making loans. Banks receive interest payments on their assets, such as loans, but they also generally have to pay interest on their liabilities, such as savings accounts. A bank’s business model relies on receiving a higher interest rate on the loans (or other assets) than the rate it pays out on its deposits (or other liabilities). (...) The commercial bank uses the difference, or spread, between the expected return on their assets and liabilities to cover its operating costs and to make profits
In order to make extra loans, an individual bank will typically have to lower its loan rates relative to its competitors to induce households and companies to borrow more. And once it has made the loan it may well ‘lose’ the deposits it has created to those competing banks. Both of these factors affect the profitability of making a loan for an individual bank and influence how much borrowing takes place. (...)
onal liabilities to accompany their new loans. In practice other banks would also be making new loans and creating new deposits
Banks therefore try to attract or retain additional liabilities to accompany their new loans. In practice other banks would also be making new loans and creating new deposits, so one way they can do this is to try and attract some of those newly created deposits. In a competitive banking sector, that may involve increasing the rate they offer to households on their savings accounts. By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2

Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending.

To prove an argument why not analyse the causes of a failed bank
http://www.bankofengland.co.uk/pra/Documents/publications/reports/hbos.pdf

Quote:
62. The disparity between the amount HBOS lent to its customers and the amount it held in customer deposits was further highlighted by HBOS’s loan-to-deposit ratio, which increased from 143% at the time of the merger to 170% at the end of 2007. While this was below the Bank of Scotland level of 194% immediately before the merger, it was well above the ratios of HBOS’s clearing bank competitors and at the top of the range for UK mortgage banks, with the exception of Northern Rock which failed. By the end of 2008, HBOS’s loan-to-deposit ratio had reached 192%.
155. Further, with household savings ratios declining in a number of countries, including the United Kingdom, banks also had to rely more heavily on wholesale borrowing to expand lending. Securitising packages of loans and selling them on to wholesale investors quickly became an important and cheaper way for banks to raise funds for new lending. It also created new dependencies, however, with securitising vehicles requiring liquidity commitments from their bank sponsors. Securitisations using master trusts also required the originator to be able to replenish or top up the asset pool, meaning the originator had to be capable of continued lending, while strengthening its obligations to the securitisation structure.
160. With a significant proportion of banks’ funding coming from other financial institutions; shadow banks in turn dependent on liquidity support from banks; high system leverage; and chains of interdependencies created by complex financial products; linkages between financial institutions inevitably grew. The opacity of the system also grew and thus the ability of individual institutions and regulators to identify and assess the build-up of risks declined. This increased the risk that problems or concerns in one part of the global financial system could be rapidly transmitted to another part of the system, and then transmitted on again, and again.
234. While the Group found it reasonably easy to grow its assets, it found it much more difficult to increase deposits. As a result, with the exception of a small pick-up in 2004, the Group’s self-funding ratio declined steadily from around 66% in 2001 to 56% in 2007 (Chart 2.22), while the customer funding gap almost trebled from £68 billion to £190 billion.

Your comment

Quote:
Also that banks only have 3% coverage of their loans.

concerns what is called fractional reserve banking. Some "radicals" are demanding 100% reserve banking but that will mean simply banks hoarding cash. Much the same as those callin for the return to the gold standard...hardly going to rock the foundations of capitalist exploitation of wage labour and extraction of surlus-vlue

Noa Rodman
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Sep 16 2016 08:29

To be clear, the graph I gave is not the loan to deposit ratio that Alb speaks of.

The L/D ratio is easy to find. I think it is given by the FRED site, for each country going back decades; just google "Bank Credit to Bank Deposits for" and then the name of the country, eg for the US: https://fred.stlouisfed.org/series/DDSI04USA156NWDB

In the US the L/D never even surpassed 90%, but in other countries it is above 100% (eg 180%). I seem to notice a trend in the late 1980s with a lot of countries the L/D starting to surpass 100%.

Noa Rodman
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Sep 17 2016 08:22

Aggregated balance sheet of euro area monetary financial institutions (MFIs), excluding the Eurosystem : July 2016: https://www.ecb.europa.eu/stats/services/escb/html/table.en.html?id=JDF_BSI_MFI_BALANCE_SHEET

Total loans do surpass total deposits a bit (17,570,598 versus 17,129,393 millions of euro).

But if you look at loans and deposits just to/of non-MFIs and excluding government, they are 10,812,606 versus 11,783,393 (though in individual countries this excess of deposits isn't always the case).

Probably these numbers in any case won't convince the ex-nihilo camp, since they say that when a bank extends a loan it gives its phantom money onto a deposit of the borrower, so it seems for the ex-nihilos that loans automatically would equal deposits.

I think we have to look into the concrete detail of clearing systems, like CHAPS to find how one bank sends its money of account to another bank, ie how does the technical/software system avoid that one bank pays another bank just with its own fake phantom money, instead of with "cash"central bank money of account.

Noa Rodman
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Sep 18 2016 08:45

I'm actually doubtful whether the ex-nihilo camp says that commercial banks can create central bank money, but that is in fact the only thing that I object to against their fallacy. Inter-bank payments occur through the banks' settlement accounts at the Bank of England. Why else would they demand to make it easier for 'non-bank' groups to be able to open a settlement account at the central bank;
http://positivemoney.org/2016/06/bank-of-england-uk-banks-to-lose-their-status-as-gatekeepers-to-the-payment-system/

mckiddycad
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Sep 19 2016 01:51

They can create these credit instruments, but I think the banks sold them to others on the market precisely to get money!!!

Noa Rodman
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Sep 19 2016 08:17
Cooked wrote:
Also that banks only have 3% coverage of their loans. (Sweden) these are figures and arguments basically pulled out of my arse but I have vague recollections that they are from mainstream *reputable" sources.

There is actually 0% reserve requirement in Sweden:

wikipedia wrote:
Canada, the UK, New Zealand, Australia and Sweden have no reserve requirements.

In the US:

Quote:
institutions with net transactions accounts:
Of less than $15.2 million have no minimum reserve requirement;
Between $15.2 million and $110.2 million must have a liquidity ratio of 3% of liabilities;
Exceeding $110.2 million must have a liquidity ratio of 10% of liabilities.

In the US prior to the crisis the reserve balances held at the Fed were hardly even a $ dozen billion: https://fred.stlouisfed.org/series/WRESBAL?cid=32215

This sufficed to operate daily transactions that were greater than $ 2 trillion:
http://www.federalreserve.gov/paymentsystems/files/fedfunds_qtr.txt

---

For an inter-bank payment, a bank can obtain the necessary 'central bank money' from the central bank by selling a security to it. Clearly it is the central bank itself, not the commercial bank, which creates this money.

But the question is, whether commercial banks have free/unlimited access to the central bank's facility, ie whether the central bank could some moment refuse to accept to facilitate the commercial banks.

Or maybe, in case the central bank does not have this ability (because that would crash the system?), perhaps it does have a relative power about the conditions under which this facilitation happens, ie to increase/reduce the interest rate at which the commercial banks can borrow from it.

Perhaps the ex-nihilo camp is saying that even the central bank rate does not have the power to force commercial banks one way or another (borrow more or less)? This is probably the crux of the matter.