Doesn't your £100 deposit then allow Barclays to lend out £80 of that to someone else, thereby increasing their assets by that amount?
Chris
Doesn't your £100 deposit then allow Barclays to lend out £80 of that to someone else, thereby increasing their assets by that amount?
Chris
Of course not! They'll then have 80 less in their coffers and 80 more as loan assets. Net asset change zero.
I worded the question badly. What I mean to say was wouldn't the £100 deposit allow them to "create" another £80 under the fractional-reserve system and lend that out to someone else. They then still have all of the original £100 in their coffers, plus the new loan asset of £80.
Chris
Exactly, money from thin air. This is the main reason the Banks fear a run on them, they don't have the actual money to back it up on a 1 to 1 basis. This is why someone with a million quid in 1 Bank account is asking for trouble. The system is setup and has been for the last few hundred years to always favour the Banks. The taxpayer will always be used as their safety net. That's why I've been saying let them rot.
Redman
You really have misunderstood the whole concept. Only central banks can create money ("printing" it).
Banks lend out depositors' money. They only seem to create money (in terms of M4) when you include all bank deposits as money, without subtracting bank loans. If all banks could really create money then we'd have the same level of inflation as Zimbabwe.
The "fractional reserve" system is simply telling the banks that they can lend out most of their deposits but not all, some they have to keep back as reserve to cover bad debts and deposit withdrawals.
What a load of bullshit. If they could create "money from thin air" then a run wouldn't be a problem, would it? They'd just create more money "from thin air".
They fear a run because most of their depositors' money is lent out as loans, so if all the depositors want their money back there won't be enough in their coffers. They can't go round demanding their money back from people they've just lent 100,000 to for a house etc.
And let their depositors and the economy rot too then?
And a £100 liability, that more than compensates for it!
A fair point.
Ah, but they could require of their shareholders to lodge as reserves exactly the amount of money that the bank has loaned out, so that all the depositors can in fact claim their money at once. The shareholders can collect once the bank has called in its loans.
It seems to me that such an arrangement would keep loans to sensible levels (the shareholders' interests are aligned with this) thus preventing credit bubbles, and yet reassuring the bank's depositors that they are always guaranteed to get their money back (it's the shareholders who take both the risks and the profits).
FoFP
If the shareholders have supplied the loan capital then what are the depositors' funds used for? It would appear that under this scheme the depositors would have to pay the bank to look after their money for them.
In message , M Holmes writes
But then the banks couldn't pay their Directors such inflated salaries and benefits as there would be nothing left for the shareholders so no one would want to invest in the Banks. Perhaps we should return to bartering.
In that case, the shareholders are the depositors! In fact, what you have is a mutual, like a traditional building society.
(You do actually get this sort of distinction with mutuals, e.g. depositors with share accounts get the right to vote and good rates of interest, but they may also operate current accounts, which are not share accounts.)
One other point to realise, is that, to a large extent, in western economies, the people do own the economy, typically in the form of pension funds and life insurance policies, so shifting risk from depositors to shareholders doesn't remove the risk from the general population.
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