> Australian banks make their money through mortgages
Where do you think your banks get the money to loan out for mortgages? I’ll give you a hint: your deposits. This is how banks work.
Where do you think your banks get the money to loan out for mortgages? I’ll give you a hint: your deposits. This is how banks work.
But they're going to use depositor funds first because these days those funds are available at a virtually 0% rate.
The 10x multiplier is on the bank's equity. For every dollar of home loan there is a dollar or more of deposits.
The multiplier effect of fraction reserve occurs over iterated loans and depositing. The fraction term comes in because the bank can lend out a fraction, less than 1, of deposits.
The real problem with failing banks is that interest rates rose steeply, and thus the MBS devalued by a significant amount.
The OP thought 10dollar of loans existed for every 1dollar of deposits. That is what I address. Instead for every say 9 dollars of loans there exists 10dollars of deposits.
You are agreeing with me. The outstanding loans are/should never be greater in value than the outstanding deposits. Aka: they should be a sub 1.0 fraction. Of course the fraction reserve aspect is the inverse ratio, itself also below 1.0.
When people request their money back en masse, banks face a liquidity issue because of the required fraction reserves they must keep. Directly or indirectly, without your deposits banks cannot lend out money.
But outside of the central bank reserve requirements the banks are free to loan our or otherwise invest their depositors cash, which is in fact prudent since cash "loses" value from inflation. Putting that excess funds into loans or other investments can all lead to what happened to SVB if a run on the bank over runs the reserves.
This seems like one sort of thing, in which money that used to be in a depositor's pocket is now in the bank and available for lending.
...and in fact they generally lend out money they borrow from a central bank...
This seems like another sort of thing, in which money that previously did not exist has been created by the Fed changing a number in a spreadsheet so it's now available for lending.
You might point out that in our system, these different-seeming things are essentially the same. If so, you're really agreeing with GP.
"APRA’s mandate is to protect the community by ensuring that, under all reasonable circumstances, financial promises made by the institutions it supervises are met within a stable, efficient and competitive financial system. So a central part of APRA’s work is to ensure that banks limit the extent of their liquidity risk."
Notice it says "all reasonable circumstances". There's a lot of nuance there, and depositors being a small group of VCs who are squeezed on cash and suddenly pulling out all deposits while interest rates are hiking while the bank bet heavily on 10+year MBS isn't the reasonable situation covered here.
> AGS permit a bank to stay fully liquid
AFAICT this only applies if the current fair value of the AGS covers the liabilities. It doesn't in the case of rapid interest rate hikes like in the US. However, it's probably true that in case of a bank run when interest rates are being lowered, bank assets can probably cover liability even if there's a 100% run.
Do note that this is the government institution explaining why the regulatory system makes things fine and people don't need to worry. I don't doubt the system is as robust as is possible, but reading between the lines, it's quite obvious (to me at least) that a SVB-like scenario can still happen in theory under the system. It will just take even more extreme parameters for that to happen (which admittedly doesn't exist in Australia right now, AFAIK).