Author Topic: Questions about fractional reserve banking!  (Read 23287 times)

xenon5

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Questions about fractional reserve banking!
« on: November 10, 2013, 12:22:58 PM »
Hey all, so I just recently learned how the fractional reserve system works and how weird it is.  I always suspected that the nature of debt injected extra money into the economy, I just didn't realize that pretty much the entire system is based on that!  I have a few questions for people who might be more knowledgeable than me.

1)So a bank can make loans for several times greater than the actual assets they have on hand.  So if my $1000 deposit allows for a $9000 loan to someone else at let's say 8%, why do I get almost nothing back if anything from making the deposit?  Why isn't there more competition between banks to hold people's money?  Why aren't there unsecured savings accounts with huge APRs?

2)Why can't a microlending site like Lending Club leverage this for its investors?  from my understanding if I deposit $1000 on such a website, it can be loaned out as $1000 distributed amount various loans.  Why is the ratio 1:1 here when a traditional bank gets up to a 1:9 ratio?

3)If someone doesn't pay back a debt to a bank and that person has no assets to liquify, how does the bank lose money they never really had in the first place?
« Last Edit: November 10, 2013, 12:24:39 PM by xenon5 »

marty998

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Re: Questions about fractional reserve banking!
« Reply #1 on: November 10, 2013, 01:39:34 PM »
It doesn't work that way.

A Bank's balance sheet works like any other. Assets, liabilities and equity.

Deposits you make with a bank count on the liabilities side (bank owes you). If a bank wants to make loans above what they have in deposits and equity, there is a "funding gap". Banks will raise the difference from wholesale credit markets. It is these credit markets that shut down in 2008 ("the credit crisis") that caused failures when banks could not refinance their wholesale funding.

The only banks that can create money from nothing are Reserve banks (e.g. your Fed). They do this by electronically crediting their own accounts and using the "money" to buy financial assets from other banks.

KingCoin

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Re: Questions about fractional reserve banking!
« Reply #2 on: November 10, 2013, 01:43:39 PM »
1)So a bank can make loans for several times greater than the actual assets they have on hand.  So if my $1000 deposit allows for a $9000 loan to someone else at let's say 8%, why do I get almost nothing back if anything from making the deposit?  Why isn't there more competition between banks to hold people's money?  Why aren't there unsecured savings accounts with huge APRs?

2)Why can't a microlending site like Lending Club leverage this for its investors?  from my understanding if I deposit $1000 on such a website, it can be loaned out as $1000 distributed amount various loans.  Why is the ratio 1:1 here when a traditional bank gets up to a 1:9 ratio?

3)If someone doesn't pay back a debt to a bank and that person has no assets to liquify, how does the bank lose money they never really had in the first place?

1) Your deposit is short dated (can be withdrawn at at time) and low risk (FDIC insured). Banks make longer dated loans (e.g. a 30yr loan against real estate) that are risky (borrower can default). There aren't high interest, unsecured, short dated savings accounts because there are very few low risk, high interest, borrowers for them to lend to.

2) There are places you can lend at ~9:1. Get a portfolio margin account at Interactive Brokers. Realize that if your assets drop in value by 11%, you're wiped out.

3) The bank borrowed the money they lent out (that's how they achieve leverage). Their lender is still owed money after the borrower defaults. They have to find it somewhere or else file for bankruptcy themselves.

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Re: Questions about fractional reserve banking!
« Reply #3 on: November 10, 2013, 03:37:38 PM »
Fractional resere lending is a red herring. Canada abolished reserves years ago, and nothing unusual happened.

A bank loan is similar to vendor financing. In vendor financing, a company loans the customer to buy its product. It can make a sale even though neither party has any money at the beginning of the transaction. When a bank makes a loan, it just increases the customer's deposit account (a liability for the bank), and creates a corresponding asset (the loan).

The bank needs capital (mainly equity) to hold against its loans. This prevents banks from creating infinite amounts of money. They also need liquidity to hold against the likely possibility that money onn deposit will leave the bank (for example, when a cheque is cleared to someone who has an account at another bank).

A non-bank lender is much less flexible. Its liabilities are unlikely to be considered money to the same extent, and it does not have the same ability to get cash to hold against withdrawals. Banks have the equivalent of backup lines with the central bank.

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #4 on: November 10, 2013, 04:43:29 PM »
Fractional resere lending is a red herring. Canada abolished reserves years ago, and nothing unusual happened.
Canada didn't abolish reserves, it stopped setting reserve requirements. Canada still has fractional reserve banking.

CDP45

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Re: Questions about fractional reserve banking!
« Reply #5 on: November 10, 2013, 11:27:24 PM »
The difference is the banks can lend out the depositors money, which isn't the banks money, but will reap the profits and the risk is taken by the FDIC.

The insanity of renting storage space for crap is obviously anti mustachian, but fraction reserve banking is like storing your couch, tv, or car at the business and then that business renting out your crap to make a profit.  Both practices are insane.

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #6 on: November 11, 2013, 05:49:00 AM »
The difference is the banks can lend out the depositors money, which isn't the banks money, but will reap the profits and the risk is taken by the FDIC.
Most of the profits go to overhead and to depositors. Only the exceptionally large banks are profitable - Huntington, my hometown 'pretty large' bank, made $641M on $56B in assets, a little over 1%, to name just one example.

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The insanity of renting storage space for crap is obviously anti mustachian, but fraction reserve banking is like storing your couch, tv, or car at the business and then that business renting out your crap to make a profit.  Both practices are insane.
If you had shit you didn't need wouldn't you want to make a profit off of it? If you had capital you didn't need, why would it be insane to rent it out?

CDP45

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Re: Questions about fractional reserve banking!
« Reply #7 on: November 11, 2013, 08:26:07 AM »
The difference is the banks can lend out the depositors money, which isn't the banks money, but will reap the profits and the risk is taken by the FDIC.
Most of the profits go to overhead and to depositors. Only the exceptionally large banks are profitable - Huntington, my hometown 'pretty large' bank, made $641M on $56B in assets, a little over 1%, to name just one example.

Very good, you have identified the Return on Assets ratio, which yes does seem small but that's not really the true measure of bank investors return, you would want to look at return on EQUITY. which for HBAN was 12.47. I point this out because the deposits are literally used to create money out of thin air, where they only need to pay cost of funds on $100 deposit yet can create $1000 of loanable money. Really the only money at stake for the bank and it's owners is their equity, which is pretty good. The problem these days is no one wants to take out loans. What's HBANs cost of funds? I bet quite small..and just given the definition of profit, I would say all of that goes to the investors. http://wiki.mises.org/wiki/Criticism_of_fractional_reserve_banking

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The insanity of renting storage space for crap is obviously anti mustachian, but fraction reserve banking is like storing your couch, tv, or car at the business and then that business renting out your crap to make a profit.  Both practices are insane.
If you had shit you didn't need wouldn't you want to make a profit off of it? If you had capital you didn't need, why would it be insane to rent it out?

The point is the bank doesn't own that crap, it's the depositors crap. It's insane to have so much extra crap you need to rent additional space to store it, and it's insane we let Fraction reserve banking occur.

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #8 on: November 11, 2013, 08:32:15 AM »
It's insane to have so much extra crap you need to rent additional space to store it,
Are you arguing that no one should have more money than they need at any one moment in time or are you just bad at analogies?
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and it's insane we let Fraction reserve banking occur.
Why?

KingCoin

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Re: Questions about fractional reserve banking!
« Reply #9 on: November 11, 2013, 08:41:54 AM »
The point is the bank doesn't own that crap, it's the depositors crap. It's insane to have so much extra crap you need to rent additional space to store it, and it's insane we let Fraction reserve banking occur.

So you think people should just put their money in a big Scrooge McDuck style vault and scoop out a fistful of coins every time they want to go buy some toilet paper? Why not have that money lent out in order to do something productive in the world? I agree that banks should remain well capitalized and the government shouldn't be put in the position to cover losses, but that doesn't mean it's a bad idea.

I'll add that banks are competitive with each other, which means that broadly speaking, lending rates will accurately reflect the current interest rate environment and the risk of the borrower. All the fat cat bankers didn't have a meeting and cook up some scheme to fleece Joe Mainstreet.  If anything, banks should be accused of having made loans too easily and at rates that were too low.

Dr. A

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Re: Questions about fractional reserve banking!
« Reply #10 on: November 11, 2013, 10:19:20 AM »
1)So a bank can make loans for several times greater than the actual assets they have on hand.  So if my $1000 deposit allows for a $9000 loan to someone else at let's say 8%, why do I get almost nothing back if anything from making the deposit?  Why isn't there more competition between banks to hold people's money?  Why aren't there unsecured savings accounts with huge APRs?

This was sort-of answered above, but wanted to make sure it was clear. What 9:1 leverage means is that if the bank has $1000 of its own money (equity, generally from initial proceeds of the sale of stock plus retained profits, and a bunch of other miscellaneous accounting gobbledy-gook), it can lend out $9000, but only if it borrows $8,000 from someone else. Ideally, they want to borrow from depositors because this is the cheapest money available, but could also borrow that money from other banks or from people who buy bonds. But, they must actually have the $9,000 in order to lend it.

As to the last part, there are a few reasons that I can think of:

A) There is some competition. See Ally Bank or Capital One 360.

B) It is a place you can store your cash that is zero-risk (because of FDIC) and 100% liquid. Low-risk + high liquidity = low interest rate. The banks do want your deposits, but they also want to maximize their earnings. The more they pay you, the less they make from lending that money. Further, if they take in too much in deposits and can't lend it all out, they are stuck paying you interest but not making anything from your money. A bank with surplus deposits may lower rates to discourage more deposits.

C) Remember, that 8% is before the costs of servicing the loan (buildings, employees, mailings, compliance with regulations) and defaults. The bank actually makes much less than 8% on that loan at the end of the day.

2)Why can't a microlending site like Lending Club leverage this for its investors?  from my understanding if I deposit $1000 on such a website, it can be loaned out as $1000 distributed amount various loans.  Why is the ratio 1:1 here when a traditional bank gets up to a 1:9 ratio?

You could leverage yourself through Lending Club today, by borrowing through LC, then turning around the money and investing it in LC loans. If you have very good credit, and borrow at a low rate, then invest in lower-graded loans, you would pocket the difference. This is exactly what a bank's "net interest margin" is. If you were diversified across a large number of loans, it may not even be that risky. However, the various fees that LC extracts from the process would severely cut into your margin, so it's not really worthwhile (I looked into a while ago, mostly as a thought experiment). There are plenty of better investments out there.

CDP45

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Re: Questions about fractional reserve banking!
« Reply #11 on: November 11, 2013, 02:18:12 PM »
It's insane to have so much extra crap you need to rent additional space to store it,
Are you arguing that no one should have more money than they need at any one moment in time or are you just bad at analogies?
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and it's insane we let Fraction reserve banking occur.
Why?

I am hoping to improve on my analogies..

Do you remember 2008? Due to leverage, say at 10% reserve requirement, if an asset is marked down 10%, 100% of equity would be lost. So without the FDIC, savers would lose their money, and with we had massive bailouts, more debt, corruption, and now an even more concentrated banking system dominated by the big 5 banks.

CDP45

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Re: Questions about fractional reserve banking!
« Reply #12 on: November 11, 2013, 02:30:25 PM »
The point is the bank doesn't own that crap, it's the depositors crap. It's insane to have so much extra crap you need to rent additional space to store it, and it's insane we let Fraction reserve banking occur.

So you think people should just put their money in a big Scrooge McDuck style vault and scoop out a fistful of coins every time they want to go buy some toilet paper? Why not have that money lent out in order to do something productive in the world? I agree that banks should remain well capitalized and the government shouldn't be put in the position to cover losses, but that doesn't mean it's a bad idea.

I'll add that banks are competitive with each other, which means that broadly speaking, lending rates will accurately reflect the current interest rate environment and the risk of the borrower. All the fat cat bankers didn't have a meeting and cook up some scheme to fleece Joe Mainstreet.  If anything, banks should be accused of having made loans too easily and at rates that were too low.

I don't think the government should be subsidizing financial risk at the sole profit of bank owners at the expense of tax payers. That's why it's a bad idea, but FRB doesn't really work without a FDIC guarantee, so I'm really more opposed to the FDIC.

I wouldn't call it an explicit one time conspiracy, but a concerted effort over decades to fleece mainstreet. Lending rates are similar yes, but do not reflect the actual risk of the borrowers due to the govt subsidy.

CDP45

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Re: Questions about fractional reserve banking!
« Reply #13 on: November 11, 2013, 02:35:26 PM »

2)Why can't a microlending site like Lending Club leverage this for its investors?  from my understanding if I deposit $1000 on such a website, it can be loaned out as $1000 distributed amount various loans.  Why is the ratio 1:1 here when a traditional bank gets up to a 1:9 ratio?


Yes it possible to buy into leveraged funds, but they typically go bankrupt, and that's why the practice is rare without an unlimited federal government guarantee. Though that can fail also (see Iceland, Ireland, Cyprus, etc..)

matchewed

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Re: Questions about fractional reserve banking!
« Reply #14 on: November 11, 2013, 02:37:43 PM »
So how do you propose the banking system works then CDP45? If, and correct me if I'm wrong, you feel that banks should not use the money they hold on behalf of their customers for the purpose of lending out to others then how does the system work? If you remove FDIC then what incentive does an individual have to use a bank? If there isn't an incentive for individuals to use banks then who does a person go to for loans?

I'm not sure if you've thought out this dismantling of the banking system's foundation to a large extent.

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #15 on: November 11, 2013, 03:13:01 PM »
Do you remember 2008? Due to leverage, say at 10% reserve requirement, if an asset is marked down 10%, 100% of equity would be lost. So without the FDIC, savers would lose their money, and with we had massive bailouts, more debt, corruption, and now an even more concentrated banking system dominated by the big 5 banks.
No! That's fundamentally not how reserves work! If an all of the assets owned by the bank are marked down ten percent, the bank's equity would be marked down by nine percent. That loan is a liability for another bank, where the borrower holds their cash; bank 2 then lends out 81 percent of the original value, and so on. A 10% reserve ratio does not equate to 10x leverage for any single bank, it equates to a multiplier for the entire financial system (which is without a doubt far less than 10x because very little of the loans are taken out for the funds to sit in checking accounts, and the multiplier effect also doesn't work for any actual currency). Before the crash, the multiplier was less than two, and now it's less than one.


Yes it possible to buy into leveraged funds, but they typically go bankrupt, and that's why the practice is rare without an unlimited federal government guarantee. Though that can fail also (see Iceland, Ireland, Cyprus, etc..)
Iceland and Cyprus had currency crises, not deposit failures. You're conflating foreign exchange with federal deposit insurance.

KingCoin

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Re: Questions about fractional reserve banking!
« Reply #16 on: November 11, 2013, 06:09:48 PM »
The primary purpose of FDIC is to instill confidence in depositors and prevent bank runs. This benefits both depositors and banks. Yes, any kind of government backstop or insurance can introduce the risk of moral hazard, but by and large, the FDIC has been a very successful program. No need to make perfect the enemy of good.

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #17 on: November 11, 2013, 06:43:44 PM »
Preventing bank runs is also necessary for monetary policy to be possible. It doesn't matter what the Fed does with the discount rates or its asset purchase programs if depositors take all their money out of financial institutions whenever things turn bad. That's procyclical - another factor worsening the credit crunch that already would have happened as the business cycle turned downward.

So like the moral hazard or not, it's a necessary component of financial markets.

CDP45

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Re: Questions about fractional reserve banking!
« Reply #18 on: November 11, 2013, 09:07:42 PM »
matchewed- I propose that we stop creating socialized federal debt to subsidize/bailout the largest banks at the expense of the American people. We can have FRB, but it must be explicit to the depositor that their funds are at risk and if some insurance companies want to get involved that's their choice. People will still have an incentive for banks. See Mises.org for more. Banking did, has, and will exist without the American people socializing the losses and privatizing the gains for a few big banks.

I grant thee a name of "little starfish," for you will witness the shallow waters moving aside to let deep seas roll in:

Please refer to the balance sheet. A-L=E. If there is only a 10% reserve capital requirement, that means L=.90A. Now assets fall 10% due to a massive bubble bursting,  .90A-L=??, well since L-.90A, E=0.  Think about a mortgage at 20%,  A-.80L=.20. Now the house falls 20% in price, how much equity is left? 0.

Sorry, the total money supply has very little to do with M1. try M3 and beyond for the full effect.

Iceland and Cyprus had bank failures which caused a currency crises because the governments were going to print reserves to recapitalize the banks i.e monetize the debt.

Monetary policy (inflation) is the enemy of savers and early retirement.

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #19 on: November 11, 2013, 09:18:20 PM »
Please refer to the balance sheet. A-L=E. If there is only a 10% reserve capital requirement, that means L=.90A. Now assets fall 10% due to a massive bubble bursting,  .90A-L=??, well since L-.90A, E=0.  Think about a mortgage at 20%,  A-.80L=.20. Now the house falls 20% in price, how much equity is left? 0.
There's more than one bank, so there's more than one balance sheet, as I tried to explain above. In other news, if the reserve requirement is ten percent, loans are ninety percent of deposits and not the other way around.

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Monetary policy (inflation) is the enemy of savers and early retirement.
I don't think monetary policy and inflation are synonyms. Cool catchphrase though.

CDP45

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Re: Questions about fractional reserve banking!
« Reply #20 on: November 11, 2013, 10:17:00 PM »
Assets being loans and deposits being liabilities for banks... and your point about all the balance sheets is why systemic risk threatened the banking system of the world in 2008.

Again you are incorrect: if loans (assets) were .90 of deposits (liability) that implies equity of -.10, not a very productive banking scenario. See capital adequacy ratio (http://en.wikipedia.org/wiki/Capital_adequacy_ratio)

The only reason monetary policy exists is to monetize the outstanding debt due to deficit spending and enrich bankers.

Good effort little starfish! Do you have more questions?

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #21 on: November 11, 2013, 10:30:42 PM »
Love the condescension, big starfish.

Do you agree that reserves are deposits that you don't make loans against?
Do you then agree that there are deposits that loans are made against and deposits that do not have loans made against them?
Then there are more deposits than loans?
« Last Edit: November 11, 2013, 10:32:36 PM by grantmeaname »

CDP45

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Re: Questions about fractional reserve banking!
« Reply #22 on: November 11, 2013, 10:50:21 PM »
Love the condescension, big starfish.

Do you agree that reserves are deposits that you don't make loans against?
Do you then agree that there are deposits that loans are made against and deposits that do not have loans made against them?
Then there are more deposits than loans?

You're right, I shouldn't get so invested (haha pun not intended) in this, and I hope you are persuaded by the truth and not how I'm poorly delivering it. Domination is meant for business, sports, and war, we all are seeking freedom here. You are quite informed for a 21yo though, keep at it.

Reserves are not deposits, they are retained earnings. I understand your phrase about loans made against deposits, but loans are actually made against assets (mostly) and funded by deposits. Literally by definition deposits have to be less than assets or else it's bankruptcy. Bank balance sheets are really screwy. I think it should be more like lending club where the service just matches up deposits and loans and keeps the risk with the depositor.

marty998

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Re: Questions about fractional reserve banking!
« Reply #23 on: November 12, 2013, 04:07:23 AM »

Reserves are not deposits, they are retained earnings. I understand your phrase about loans made against deposits, but loans are actually made against assets (mostly) and funded by deposits. Literally by definition deposits have to be less than assets or else it's bankruptcy. Bank balance sheets are really screwy. I think it should be more like lending club where the service just matches up deposits and loans and keeps the risk with the depositor.

I have to jump in here and point out a few things. To all you hard done by consumers please forgive my spirited defence of the industry at the end.

1) Reserves are not retained earnings. Subtle difference here and there
2) There's a concept in banking called risk weighted assets. When calculating capital ratios such as tier 1 and tier 2 etc, some assets are treated differently to others. This allows banks (such as the one I work for) to have a Tier 1 capital ratio of 9%, but have a debt ratio of 94% based on the common accounting definition ($6 equity for every $100 of assets)
3) Deposits can be more than interest bearing assets. Should a bank have an excess of deposits, the bank will simply have non-interest bearing assets on its balance sheet (being the cash that it holds with itself if that makes any sense). This doesn't necessarily result in bankruptcy, provided the bank's net interest margin is still sufficient to turn a profit. The problem comes when a sufficiently large number of interest bearing assets are written off/impaired, but the majority of banks can survive with appropriate capital injections, or simply being taken over.
4) Banks (in Australia anyway) generally have fixed interest liabilities (wholesale credit funding or term deposits) and variable interest assets (business loans, home loans and personal/credit card loans). This creates a mismatch and needs to be managed via interest rate swaps to change variable rate loans into fixed rate loans, or fixed into variable so that interest rate risk is managed and duration risk is managed. The cause of every single bank failure in the world can be traced to poor ALM (Asset/Liability Management) by the respective bank's treasury function.
5) The IR swaps mentioned above are derivatives (yes those evil things) and expose the bank to counter-party risk. The face value of derivatives used by banks to engage in ALM can be many multiples the size of their own balance sheet. When you hear of financial commentators talking about 100's of trillions of dollars of derivatives, this is what they are talking about.
6) It should be obvious that banking can't be like lending club. Banks can and do aggregate the savings of thousands of people and lend them to a single borrower. Lending club is almost the opposite.

grantmeaname mentioned earlier about his bank making a return on asset of 1%. I think that proves the riskyness of the banking industry. If 1% additional loans go bad then the bank makes a loss for the year. Most people would fail very quickly had to live their life within a 1% margin of error. Banks have to do it every day year in year out. It's a tough industry requiring very smart switched on people to keep it operating. A very fine line between profit and....calamity.

I'm not going to use this platform to defend all bankers salaries. The ones working for ordinary savings and loans type banks which keep the world turning, fine I don't have a problem. The ones which recently brought the world to its knees, they can go hang as far as I am concerned.


grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #24 on: November 12, 2013, 05:59:27 AM »
Reserves are not deposits, they are retained earnings.
Retained earnings are an equity account and reserves are an asset. The fact that retained earnings exist means that there are other assets that have accumulated and that revenues have exceeded expenses.

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I understand your phrase about loans made against deposits, but loans are actually made against assets (mostly) and funded by deposits.
Loans are secured by borrowers' assets and recognized as a liability on the borrower's balance sheet but are themselves assets and so can't be secured by assets on the bank's side of the table. I think you're conflating or confusing the two.

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I think it should be more like lending club where the service just matches up deposits and loans and keeps the risk with the depositor.
And lose the benefit of diversification? To what end?
« Last Edit: November 12, 2013, 06:06:44 AM by grantmeaname »

CDP45

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Re: Questions about fractional reserve banking!
« Reply #25 on: November 12, 2013, 08:27:06 AM »

Reserves are not deposits, they are retained earnings. I understand your phrase about loans made against deposits, but loans are actually made against assets (mostly) and funded by deposits. Literally by definition deposits have to be less than assets or else it's bankruptcy. Bank balance sheets are really screwy. I think it should be more like lending club where the service just matches up deposits and loans and keeps the risk with the depositor.

I have to jump in here and point out a few things. To all you hard done by consumers please forgive my spirited defence of the industry at the end.

1) Reserves are not retained earnings. Subtle difference here and there - reserves are equity, not assets.


2) There's a concept in banking called risk weighted assets. When calculating capital ratios such as tier 1 and tier 2 etc, some assets are treated differently to others. This allows banks (such as the one I work for) to have a Tier 1 capital ratio of 9%, but have a debt ratio of 94% based on the common accounting definition ($6 equity for every $100 of assets) -yes,capital falling under the equity category.



3) Deposits can be more than interest bearing assets. Should a bank have an excess of deposits, the bank will simply have non-interest bearing assets on its balance sheet (being the cash that it holds with itself if that makes any sense). This doesn't necessarily result in bankruptcy, provided the bank's net interest margin is still sufficient to turn a profit. The problem comes when a sufficiently large number of interest bearing assets are written off/impaired, but the majority of banks can survive with appropriate capital injections, or simply being taken over.

-The condition of bankruptcy is met with 0 equity, not 0 or even negative net income. Just like you said, deposits are instantly accounted into assets.


4) Banks (in Australia anyway) generally have fixed interest liabilities (wholesale credit funding or term deposits) and variable interest assets (business loans, home loans and personal/credit card loans). This creates a mismatch and needs to be managed via interest rate swaps to change variable rate loans into fixed rate loans, or fixed into variable so that interest rate risk is managed and duration risk is managed. The cause of every single bank failure in the world can be traced to poor ALM (Asset/Liability Management) by the respective bank's treasury function.

Credit unions thrive without IR swaps, it's not a necessary condition for profitable banking. I would say the cause of bank failures is risky lending leading to defaulted loans and assets that are sold for less than initially valued. What you're describing is a liquidity crises, not a solvency crisis which is what happened in 2008.

5) The IR swaps mentioned above are derivatives (yes those evil things) and expose the bank to counter-party risk. The face value of derivatives used by banks to engage in ALM can be many multiples the size of their own balance sheet. When you hear of financial commentators talking about 100's of trillions of dollars of derivatives, this is what they are talking about.
6) It should be obvious that banking can't be like lending club. Banks can and do aggregate the savings of thousands of people and lend them to a single borrower. Lending club is almost the opposite.

What? Thousands of lenders fund small portions of the loan to a single borrower at lending club, how is this different from what banks do other than take all the profits and socialize the losses?

grantmeaname mentioned earlier about his bank making a return on asset of 1%. I think that proves the riskyness of the banking industry. If 1% additional loans go bad then the bank makes a loss for the year. Most people would fail very quickly had to live their life within a 1% margin of error. Banks have to do it every day year in year out. It's a tough industry requiring very smart switched on people to keep it operating. A very fine line between profit and....calamity.

I'm not going to use this platform to defend all bankers salaries. The ones working for ordinary savings and loans type banks which keep the world turning, fine I don't have a problem. The ones which recently brought the world to its knees, they can go hang as far as I am concerned.

Bank

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Re: Questions about fractional reserve banking!
« Reply #26 on: November 12, 2013, 09:16:37 AM »

You are quite informed for a 21yo though, keep at it.

Reserves are not deposits, they are retained earnings.

Personally, I'm enjoying the delicious irony of condescendingly complimenting someone's knowledge and then immediately following it up with an incorrect statement.

I'm not going to get into the specifics of this particular pissing contest as I think it's being hashed out quite well already.  However, I will note (for those who are following along at home) that you don't fully understand the accounting and banking terms you are throwing around, CDP45.  And I say that as a CPA and a bankruptcy professional who has worked on failed financial institutions.

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #27 on: November 12, 2013, 09:35:37 AM »
To change topics slightly: CDP, if you have a problem with other people making a profit by lending out your capital, why don't you just bank with a credit union?

brewer12345

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Re: Questions about fractional reserve banking!
« Reply #28 on: November 12, 2013, 10:46:46 AM »

You are quite informed for a 21yo though, keep at it.

Reserves are not deposits, they are retained earnings.

Personally, I'm enjoying the delicious irony of condescendingly complimenting someone's knowledge and then immediately following it up with an incorrect statement.

I'm not going to get into the specifics of this particular pissing contest as I think it's being hashed out quite well already.  However, I will note (for those who are following along at home) that you don't fully understand the accounting and banking terms you are throwing around, CDP45.  And I say that as a CPA and a bankruptcy professional who has worked on failed financial institutions.

I am enjoying the two of them publicly calling each other big and little anus ("starfish").

CDP45

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Re: Questions about fractional reserve banking!
« Reply #29 on: November 12, 2013, 10:48:03 AM »

You are quite informed for a 21yo though, keep at it.

Reserves are not deposits, they are retained earnings.

Personally, I'm enjoying the delicious irony of condescendingly complimenting someone's knowledge and then immediately following it up with an incorrect statement.

I'm not going to get into the specifics of this particular pissing contest as I think it's being hashed out quite well already.  However, I will note (for those who are following along at home) that you don't fully understand the accounting and banking terms you are throwing around, CDP45.  And I say that as a CPA and a bankruptcy professional who has worked on failed financial institutions.

Please enlighten us with your experience Mr.Bank.

beltim

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Re: Questions about fractional reserve banking!
« Reply #30 on: November 12, 2013, 10:48:46 AM »

I am enjoying the two of them publicly calling each other big and little anus ("starfish").

I agree with this!  It's nice to watch the starfish rather than being one of the sparring partners.  Language is a wonderful thing.

CDP45

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Re: Questions about fractional reserve banking!
« Reply #31 on: November 12, 2013, 10:54:53 AM »
To change topics slightly: CDP, if you have a problem with other people making a profit by lending out your capital, why don't you just bank with a credit union?

I would strongly suggest everyone use a credit union, much better rates for depositors.

I don't have a problem with banks making a profit, I have a problem with the government using tax dollars to subsidize those profits and then socializing the losses.

What does starfish have to do with anus?? Didn't you see my deep seas analogy? I'm not calling him that lol.

brewer12345

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Re: Questions about fractional reserve banking!
« Reply #32 on: November 12, 2013, 11:16:24 AM »

I am enjoying the two of them publicly calling each other big and little anus ("starfish").

I agree with this!  It's nice to watch the starfish rather than being one of the sparring partners.  Language is a wonderful thing.

Actually, I would suggest this has gone way beyond polite disagreement, but they turned me down when I offered to be a mod so its not my problem.

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #33 on: November 12, 2013, 11:18:06 AM »
Actually, I would suggest this has gone way beyond polite disagreement, but they turned me down when I offered to be a mod so its not my problem.
Yeah. Like mom always said, if you can't make the problem better directly it's better to just make asshole jokes.

Edit: To be clear I'm not a mod either. Medically unfit for duty - I'm flat footed.
« Last Edit: November 12, 2013, 11:46:40 AM by grantmeaname »

JohnGalt

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Re: Questions about fractional reserve banking!
« Reply #34 on: November 12, 2013, 11:39:05 AM »

I am enjoying the two of them publicly calling each other big and little anus ("starfish").

I agree with this!  It's nice to watch the starfish rather than being one of the sparring partners.  Language is a wonderful thing.

Actually, I would suggest this has gone way beyond polite disagreement, but they turned me down when I offered to be a mod so its not my problem.

While I'll agree that there were some condescending comments made earlier in the thread.  It appears that you're the one attempting to escalate the problem.


To change topics slightly: CDP, if you have a problem with other people making a profit by lending out your capital, why don't you just bank with a credit union?

I would strongly suggest everyone use a credit union, much better rates for depositors.

I don't have a problem with banks making a profit, I have a problem with the government using tax dollars to subsidize those profits and then socializing the losses.

What does starfish have to do with anus?? Didn't you see my deep seas analogy? I'm not calling him that lol.

Regardless - let's please keep the discussion going and leave the condescension and insults out. 

brewer12345

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Re: Questions about fractional reserve banking!
« Reply #35 on: November 12, 2013, 11:41:42 AM »
Quote
“When Švejk subsequently described life in the lunatic asylum, he did so in exceptionally eulogistic terms: 'I really don't know why those loonies get so angry when they're kept there. You can crawl naked on the floor, howl like a jackal, rage and bite. If anyone did this anywhere on the promenade people would be astonished, but there it's the most common or garden thing to do. There's a freedom there which not even Socialists have ever dreamed of.”
― Jaroslav Hašek, The Good Soldier Švejk



Mr.Macinstache

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Re: Questions about fractional reserve banking!
« Reply #36 on: November 13, 2013, 11:44:45 AM »
The 12yr old girl lays it out pretty well.
http://www.youtube.com/watch?v=_ae7h8FioX0

KingCoin

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Re: Questions about fractional reserve banking!
« Reply #37 on: November 13, 2013, 01:26:45 PM »
The 12yr old girl lays it out pretty well.
http://www.youtube.com/watch?v=_ae7h8FioX0

"What I have discovered is the banks and the government have colluded to financially enslave the people of Canada."

She forgot to mention the Free Masons! I'll forgive the oversight since she's only 12.

"the government gave the banks the ability to loan out money that doesn’t exist in the form of loans. When a bank actually gives you a mortgage, which literally means a death pledge’ or a loan, the banks do not actually give you money. They click a key on a computer and generate the fake money out of thin air."

Wait, so banks loan money in the form of a loan which literally means a loan?  Mind blown.  Who knew that you bought your house with computer clicking fake money? I for one look forward to the day when all real estate transactions are conducted in gold bars and bitcoins. Though, come to think of it, buying a real house with quickly inflating fake money sounds like a pretty great idea.

"What I find interesting is even Jesus in Matthew 21 drove out the money changers in the temple because they were manipulating the currency to steal money from the people.
The private banks are just like the money changers in Matthew 21, They are defrauding and robbing the people of Canada of their money; thus, their freedom and they need to be stopped."

WWJD? End the Fed.

« Last Edit: November 13, 2013, 01:33:32 PM by KingCoin »

Mr.Macinstache

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Re: Questions about fractional reserve banking!
« Reply #38 on: November 13, 2013, 01:39:24 PM »
Ok, so the Fed does not create money via the FRB system?

I'm convinced that if people actually knew that the Federal Reserve isnt federal nor does it hold any reserves, and understood how it operated, there would be more opposition to our currency being controlled by a private cartel that is our central bank. Monopolies are not a good thing.

And this just in:
http://www.moneynews.com/StreetTalk/Andrew-Huszar-Fed-easing-policy/2013/11/12/id/536284

Quote
"The central bank continues to spin QE [quantitative easing] as a tool for helping Main Street," says Huszar, now a senior fellow at Rutgers Business School. "But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time."

"I'm sorry, America,"

Hazah, hazah! All hail the Fed.
« Last Edit: November 13, 2013, 01:50:06 PM by Mr.Macinstache »

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #39 on: November 13, 2013, 01:54:44 PM »
Do you have any serious arguments or just cheap, half-true insinuations?

KingCoin

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Re: Questions about fractional reserve banking!
« Reply #40 on: November 13, 2013, 02:35:02 PM »
We can debate Austrian vs Keynsian economics, the utility/legality/morality of the Fed and FRB, and whether QE has been worth it, but this is almost certainly not the right forum for it.  There are plenty of thoughtful pieces on the internet both pro and con available to those interested.

But seriously, using a 12 year old to deliver some ideologically charged speech that's free of any kind of rigorous analysis, but which drops terms like slavery, accuses a group of criminality without leveling a charge, and invokes Jesus and Margaret Mead is just the worst and least productive kind of discourse.

Mr.Macinstache

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Re: Questions about fractional reserve banking!
« Reply #41 on: November 13, 2013, 02:35:37 PM »
Do you have any serious arguments or just cheap, half-true insinuations?

Do you have any serious responses to what you think is "half true"?

KingCoin

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Re: Questions about fractional reserve banking!
« Reply #42 on: November 13, 2013, 03:03:24 PM »
Do you have any serious responses to what you think is "half true"?

Your claim (or insinuation): The purpose of the fed and QE is to increase banker bonuses and financially enslave the citizenry.  This is so obvious, that even a 12 year old girl can see it to be true.
The Feds claim: The purpose of the Fed and QE is to control banking crises and maximize employment subject to price stability.

What's half-true? That controlling banking crises is often good for bankers. But more broadly speaking, which of the above is likely more true?

Imagine that in two years, unemployment has fallen to 5%, inflation is creeping north of 3%, debt service continues to fall as a percentage of disposable income (http://research.stlouisfed.org/fred2/series/TDSP), and banker bonuses have fallen to half their previous levels. Do you think the Fed would be gravely concerned and increase QE because bankers are suffering and the citizenry is less enslaved? Or do you think the Fed would be eliminating QE?
« Last Edit: November 13, 2013, 03:16:06 PM by KingCoin »

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #43 on: November 14, 2013, 07:42:26 AM »
I'm convinced that if people actually knew that the Federal Reserve isnt federal
There are regional and national Fed branches that coordinate their activities and have different powers. Federalism!

Quote
nor does it hold any reserves,
Yes, it does.

Quote
a private cartel
The Fed is neither private nor a cartel.

Quote
And this just in:http://www.moneynews.com/StreetTalk/Andrew-Huszar-Fed-easing-policy/2013/11/12/id/536284
Quote
"The central bank continues to spin QE [quantitative easing] as a tool for helping Main Street," says Huszar, now a senior fellow at Rutgers Business School. "But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time."

"I'm sorry, America,"
One person who twice worked at and then quit the Fed and now has a non-tenured position at a business school that's not even in the top fifty nationally has political views which lead him to believe that the bank does something that is bad? This truly is an unprecedented conspiracy that reaches all the way to the black heart of American democracy!

CB

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Re: Questions about fractional reserve banking!
« Reply #44 on: November 14, 2013, 08:59:19 AM »
Do you have any serious arguments or just cheap, half-true insinuations?

Thanks for posting that, glad I'm not the only one who sees it this way. 

Mr.Macinstache

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Re: Questions about fractional reserve banking!
« Reply #45 on: November 14, 2013, 09:15:11 AM »
I'm convinced that if people actually knew that the Federal Reserve isnt federal
There are regional and national Fed branches that coordinate their activities and have different powers. Federalism!

Quote
nor does it hold any reserves,
Yes, it does.

Quote
a private cartel
The Fed is neither private nor a cartel.

Quote
And this just in:http://www.moneynews.com/StreetTalk/Andrew-Huszar-Fed-easing-policy/2013/11/12/id/536284
Quote
"The central bank continues to spin QE [quantitative easing] as a tool for helping Main Street," says Huszar, now a senior fellow at Rutgers Business School. "But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time."

"I'm sorry, America,"
One person who twice worked at and then quit the Fed and now has a non-tenured position at a business school that's not even in the top fifty nationally has political views which lead him to believe that the bank does something that is bad? This truly is an unprecedented conspiracy that reaches all the way to the black heart of American democracy!
We are a constitutional republic, not a democracy.

And Edward Snowden is just some disgruntled ex-employee... in no way does one voice hold any truth to the situation? Of course anyone who has been warning about NSA spying for years before the many whistleblowers came out were just tin foil head spouting cheap insinuations.

And just because a bank has national and regional branches, they are Federal? LOL

The fed is a cartel of private bank who participate in the system. It's a centralized, top down monopolized system on our currency. This their own words, people can deny it all they want. When the chair admits they aren't beholden to anyone but themselves it pretty obvious. But you guys believe what you want, enjoy yourselves.

grantmeaname

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Re: Questions about fractional reserve banking!
« Reply #46 on: November 14, 2013, 09:17:37 AM »
Sure, don't let facts or logic ruin your day!

matchewed

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Re: Questions about fractional reserve banking!
« Reply #47 on: November 14, 2013, 09:22:03 AM »
Yeah, I'm not so sure grant is the one that should be accused of working on belief on this one.

Mr.Macinstache

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Re: Questions about fractional reserve banking!
« Reply #48 on: November 14, 2013, 09:34:20 AM »
Sure, don't let facts or logic ruin your day!

You're one to talk. Someone who gets their "facts" from the fox guarding the hen house.

Enjoy your Democracy!

CB

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Re: Questions about fractional reserve banking!
« Reply #49 on: November 14, 2013, 10:06:46 AM »
The fed is a cartel of private bank who participate in the system. It's a centralized, top down monopolized system on our currency. This their own words, people can deny it all they want. When the chair admits they aren't beholden to anyone but themselves it pretty obvious. But you guys believe what you want, enjoy yourselves.

These are exactly the cheap, half-true insinuations people are calling you out on. 

If you don't believe in the importance of a central bank that is as decoupled as possible from politics, it's hard to have a rational discussion of monetary policy or macroeconomics in general.

 

Wow, a phone plan for fifteen bucks!