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Comment by lifty | Hacker News Reader

Loan creation doesn’t work like that for many many years. These days banks don’t even have a reserve requirement. They just create the money and balance the books later.

Edit: to make my point clearer, banks don’t need your deposits to create new money. They just do.

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I work at a bank in the US, your statement is false for almost all non-federal banks. There’s some complexity to it, but in general banks are required to have roughly 5% of deposits liquid at the close of every businesss day. There’s some wiggle room, but banks are never allowed to go below 0%. If it looks like they’re going to risk going below 0% they can borrow money from other banks with too much cash through the repo market, but this is expensive and regulators don’t like it so banks will strictly avoid this. This actually explains why different banks will have different loan/share rates from each other. You’d expect in an efficient market they’d all be the same, but banks deliberately make their offerings less competitive if it’ll leave them with too much cash/debt. In short, banks do not just create money in the US. They are heavily regulated, and any bank that started cooking the books and lending more than they have would be swiftly taken under management by its regulatory body.

One point that might make this clearer - the government serves as the lender of last resort for a bunch of banks. Lending more than you have would be incredibly risky - why would the institution that has to eat the potential loss allow you to do so?

How does this square with the fact that the reserve rate is now zero?

https://www.investopedia.com/terms/r/requiredreserves.asp

Most banks are regulated by either the FDIC or NCUA, not the Fed. So the fed setting reserve rates doesn’t change anything for banks that, like, normal people use. Additionally, I think you’re viewing reserve rates as the only way banks measure liquidity, which is not the case.

But, even if reserve requirements are zero, and banks are allowed to loan out every penny… they’re still not allowed to just make up money, that’s not how it works.

Reserve requirements are not the whole picture, there are also capitalisation requirements.

The reserve rate is now zero because it's no longer the favoured mechanism.

https://www.federalreserve.gov/supervisionreg/large-bank-cap...

At 5%, banks can create 20 times more new money then they hold deposits.

Obviously they don't have to go below 0%, as at 0% they are already at inifinity.

Also, they don't have to have the reserves when they are lending, they can just borrow the reserves later, which is a huge difference, as just as we've discovered - lending creates money, so you can stuck it up structurally and keep expanding.

That’s not at all how that works. At 95%, they can lend 95 cents for every dollar on deposit.

Bank A has $100 deposits, Bank B $0.

Bank A creates $95 worth of loans, which get deposited to Bank B. Now Bank A has $100 deposits, $5 reserves, $95 loans. Bank B has $95 deposits.

Bank B creates $90.25 worth of loans. These loans gets deposited to bank A. Now Bank B has ... $195.25 deposits and is ready to make $85.7375 in loans again...

> Loan creation doesn’t work like that for many many years. These days banks don’t even have a reserve requirement. They just create the money and balance the books later.

I glossed over it because it isn't really relevant to my point, but yes, the reserve requirement in the US is currently zero: https://www.federalreserve.gov/monetarypolicy/reservereq.htm

> Edit: to make my point clearer, banks don’t need your deposits to create new money. They just do.

This is not true. Like I said, banks only lend out money they have. The only way banks "create" money is because the same money can be lent out multiple times (Bank lends out Person A's money to Person B; Person B deposits their money at a bank; Bank lends out Person B's money to Person C; etc)

and what would then happen if a bank were -- somehow -- induced to make more of those loans, which, as you describe "duplicate" or "create" money a number of times up to the number of loans made?

and how would the world look if that same bank then decided to stop making so many loans?

would there be a difference in the total money "created"/"duplicated" between those two worlds?

you can quibble with language ("Many people get ensnared in a series of linguistic traps when they talk about bank accounts." - quoting the article) but I think you'll find the OP and other commenters here have a sufficiently reasonable model of what is happening under the hood in the modern banking system. I suspect if you view the OP charitably and accept that he does understand what's going on and is describing the relative difference between these two hypothetical scenarios I gave above as "more or less money creation"...the essay becomes less "bad".

You are wrong. Banks don’t need deposits to create loans/money. They crate the money, out of thin air, as the conspiracy theorists like to say it, and they pay the central bank interest on it. That’s it.

Start with this paper from the BoE if you want to learn more: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

I'm presenting an outdated and simplified version of the process, because yes, you're correct in the short term. The process happens asynchronously where the bank gets to loan out the money now and sort out the backing money later.

But it has the same _effect_: the government controls the maximum money supply and the creation of money.

> Bank lends out Person A's money to Person B; Person B deposits their money at a bank

You describe this as a two-step process, but it's actually one step, with no actual cash involved. If Person B gets a personal line of credit, it is issued as a deposit in their account at Bank, not paid as cash which is then deposited.

Even if Person B immediately spends that money (on e.g. a house), it is transferred to Person C (former homeowner) directly as a bank deposit, either at the same bank or a different one. There's never any direct cash involved - only bank deposits are moving back and forth.

> banks don’t need your deposits to create new money. They just do.

Yes, exactly. The key phrase here is

loans create deposits

When you take out a loan, the bank conjures the casino chips from thin air and increases the numbers in your bank account.

Eventually the bank's reserves at the central bank need to be a percentage of their liabilities

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