Where does the money come from for all the lending?

From lenders

Yes, that's basically what happens.

No. There are solvency rules the bank has to follow.

For unsecured debt, not even by that.

That can happen, but more likely from other banks.

The Bank of England does sell gilts. The proceeds are used by the government for public expenditure - mainly salaries. These salaries are paid into someone's bank account. The bank then lends the money to someone else.

Another thing to consider. Lets imagine there were only two people in the economy. You, and Sainsburys. Sainsburys deposits money in the bank. Bank lends it to you, you use it to buy things at Sainsburys. Sainsburys deposits this money in the bank. Bank lends it to you, you use it to buy things at Sainsburys. And so on.

As I understand it.. in theory;

Say there is a bank with £1,000,000 pounds cash.

You decide to buy a £600,000 house and decided to get a mortgage from the bank at say at 4%.

Once the mortgage has gone through, the bank has £400,000 cash left and a bit of paper that said you'll pay back £600,000 at 4%.

Now if someone else decides to also get a mortgage, the bank may not have the cash available.

So it sells your debt to other investors. For example £600,000 worth of bonds which will pay out at say 3.5%.

At this point the bank now has £1,000,000 pounds cash again.. and collects 0.5% on your mortgage.

Repeat the above and the bank can lend again, and again. With the end result that it makes 0.5% on thousands/millions of mortgages, with just £1,000,000 cash.

Obviously in real life it's more complex with changing rates and time lengths for both mortgages and bonds, coping with bad lenders etc

Regards Mark

Dave,

the article below by economist John Kutyn explains the whole process of credit creation by the banking system.

(and with nanotechnology maybe another quantum leap of miniaturisation to come)

But I think you're dead right to put the question as you have..why shouldn't a basic knowledge of arithmetic be enough to grapple with this if the money system isn't in fact a great con-trick... an enormous global self-deception. I see the money system as a rope which you are invited to climb. The rope is suspended by your lender/paymaster. He is turn is suspended on another rope reliant on a third party and so on. And who could believe that the network of support wouldn't come full circle? How would you unravel it? It's like the cartoon fall-guy who overshoots the cliff but is blissfully happy and seemingly in a state of constant and levitated motion until he sees nothing underneath.

Better not to look.

At the moment, house prices are being bid up by competition and 'confidence' and those who have 'equity' are being invited - even encouraged - to borrow against it. Some are using this borrowing to buy more houses which inevitably will tend to increase prices further and so the 'virtuous' circle continues. That's where all the money's coming from. Until......

More to the point, it's not an explanation but a demonstration of a cicularity that - for who knows what reason - seems to satisfy most people.

Imagine someone being able to rigorously prove that such an insolvency were possible.

Do property title deeds held by the building societies to cover their mortgages represent capital resources?

If so then it's probably time for a visit to the lav.

In article , Jonathan Bryce writes

Or, alternatively, yes. Solvency rules require banks cover far less than 100% of lending with available deposits.

Thank you for taking the time to respond. However I have a feeling that your understanding goes back to the days of the gold standard.

Do you know where I can download a copy, (or summary - I'm not a lawyer) of the banking solvency rules? I am interested to know whether banks could go insolvent in the event of a housing crash and many people going bankrupt. Maybe they'll just default on bonds.

I did try looking on

and found a document with some rules at The document is banking rules volume 1 of 2. Here is a typical rule:

3.3.13 R (1) A UK bank and an overseas bank must maintain capital resources which are commensurate with the nature and scale of its business and the risks inherent in that business.

This says to me that a bank can do whatever it wants.

I remember seeing on TV years ago a model of the economy with water used to represent money with sources and sinks. So maybe you need more than arithmetic, and 2nd order differential equations instead - time to dust off the maths books ...

It will. What did the person who sold the house do with the money? Either they put it in a bank account, or they paid off their own loan with the bank. Either way, the bank gets the money back. In fact, it was probably a transfer from one account to another, and the money never left them.

If your assuming there is one bank, then yes. If you assume that there are multiple banks, then possibly if the buyer and seller use the same bank.

Regards Mark

Thanks, but I'm not sure if this article represents conventional thinking. It is more like what I would have expected from alt.conspiracy.new-world-order.

what do you mean by 'conventional' thinking?

It would be pretty hard to say anything illuminating about world money without it being controversial.

In message , Mark Blewett writes

For 'Bank' read 'banking system'. Its the same thing.

In message , Dave writes

No. The gold standard only effected the issue of notes.

There arent all that much Clearing Bank bond funds in the market. Clearing banks are only narrowly exposed to the domestic house market. I.e. less than 10% of lending. Mortgage Lenders are in a different position though. The average loan to value ratio on existing mortgage books is very comfortable though and as house prices increase the average loan/value is decreasing. Higher LTV ratios are re-insured. A drop in house prices will only be a problem to lenders if borrowers default, and a drop in house prices alone wont cause defaults.

Some mortgage lenders package up tranches of mortgages and sell them, i.e.. securitise their loan book.

Thats right. But the secondary banking crash of the 70s has made supervision more strict and Chief Execs get called into to Canary Wharf from time to time for a 'little chat'.

In message , curiosity writes

Of course not.

No need then.

In message , Mark Blewett writes

Its all about the measure of MONEY and what is included when the BoE measure Money Supply. There are numerous measures, M1, M2 etc., but in general terms it includes all the notes and coin in circulation, in banks tills, AND the balances of the accounts.

So, the Bank of England issues a £10 note which is withdrawn by a Bank from its account with the BoE and held in a till drawer. Money supply £10, You come in a borrow £10 from the bank and take the £10 note which you give to me. I Pay it into the bank. Money supply = £20, i.e. the actual note plus the balance in my account. The bank now has my £10 pounds and reckons it can take the risk of lending £9.50 of i to you. You draw it out and give to me and I pay it in again. Money supply £29.50. Etc., The amount the bank can lend in each cycle is based on its liquidity ratios and interest rates. The higher the interest rate the lower the amount that it can lend each time so the fewer times the money can circulate. Also the higher the interest rate the less people will borrow. In reality the Govt want the BoE to control growth in the money supply and a symptom of this is inflation. So to control the money supply they control interest rates.

If someone asks me how much money I have, I might answer like this:

Lets see. I have £800 in my current account, £4,500 in my mini cash ISA, £1,500 in an instant access deposit account, £2,000 in an 18 month treasury deposit and £15 in my pocket. That makes (some quick arithmetic here) £8,815.

Is that £8,815 really money? It was lent out to someone else who bought something from my employer who used it to pay my salary which was paid direct to my bank account.

The answer depends on which definition of money you use. One definition is Notes and coins only, which means that the answer would be £15. One definition includes bank balances which can be converted to cash at short notice. Then the answer would be £6,815. Another adds all bank balances, so then the answer would be £8,815.

"john boyle" wrote

How does the Bank get a (non-zero) balance in its account at the BoE in the first place?

In message , Tim writes

Well the chicken came first, or was it the egg????

Clearing Banks pre-date the Bank of England so I suppose they just opened an account by cheque drawn on themselves or paid in a wodge of solid gold.