M
morganist
Read the linked article I wrote, see below.
http://morganisteconomics.blogspot....-and-bank-run-there-is.html?q=credit+crunches
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Interest Rate Hikes and Quantitative Easing
- Thread starter kmiklas
- Start date
Read the linked article I wrote, see below.
http://morganisteconomics.blogspot....-and-bank-run-there-is.html?q=credit+crunches
Let me just make a few comments comments. To begin, the statements, such as the one immediately below, you made are reflective of pre-1930s banking and are is astoundingly wrong today:Read the linked article I wrote, see below.
http://morganisteconomics.blogspot....-and-bank-run-there-is.html?q=credit+crunches
Due to the bank only holding a small percentage of the invested funds at one time, to maximise lending and boost profits, it is impossible to pay all of the investors the money they invested back in one go. When the investors demand their money and the bank cannot pay the bank fails.
Why is the statement horribly wrong?. Banks can fail, so that's not wrong. What's wrong is it suggests that depositors can't get their money because of fractional reserve banking. Nothing could be further from the truth. Fractional reserve banking is the grease of commerce, and it is what makes modern economies hum on all four cylinders, so to speak, and greatly facilitates the advancement of mankind in science and the arts.
In the United States, and I would imagine in the UK as well, an old fashioned run on the bank where depositors are not able to withdraw their money can not happen! There is zero possibility of any depositor, up to the insured limit, not being able to get their money out of any U.S. bank, whether the bank is solvent or not!!! That is what the banking acts of the 1930s were all about. In the worst cases there could be very slight delays, but even that is unlikely. So you can forget this nonsense of a "run on the bank". In that regard your thinking is 80+ years out of date. Fractional reserve banking has absolutely no affect on whether depositors can withdraw their money at any time. They can. Why you insist on this pre-1930s thinking, I do not understand.
You also made this bizarre statement:
When the subprime debt market defaulted money the banks should have received as repayment from lenders was not paid reducing the funds available to give investors making withdrawals.
This is nuts!!! Whether or not lenders repay their loans is completely disconnected from whether depositors will be able to withdraw their money. Throughout, you seem to have confused depositors with investors. Investors incur risk of loss, Depositors do not. Investors don't make "withdrawals," they sell their investment at a price greater or less than what they paid for it.
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M
morganist
Let me just make a few comments comments. To begin, the statements, such as the one immediately below, you made are reflective of pre-1930s banking and are is astoundingly wrong today:
Due to the bank only holding a small percentage of the invested funds at one time, to maximise lending and boost profits, it is impossible to pay all of the investors the money they invested back in one go. When the investors demand their money and the bank cannot pay the bank fails.
Why is the statement horribly wrong?. Banks can fail, so that's not wrong. What's wrong is it suggests that depositors can't get their money because of fractional reserve banking. Nothing could be further from the truth. Fractional reserve banking is the grease of commerce, and it is what makes modern economies hum on all four cylinders, so to speak, and greatly facilitates the advancement of mankind in science and the arts.
In the United States, and I would imagine in the UK as well, an old fashioned run on the bank where depositors are not able to withdraw their money can not happen! There is zero possibility of any depositor, up to the insured limit, not being able to get their money out of any U.S. bank, whether the bank is solvent or not!!! That is what the banking acts of the 1930s were all about. In the worst cases there could be very slight delays, but even that is unlikely. So you can forget this nonsense of a "run on the bank". In that regard your thinking is 80+ years out of date. Fractional reserve banking has absolutely no affect on whether depositors can withdraw their money at any time. They can. Why you insist on this pre-1930s thinking, I do not understand.
You also made this bizarre statement:
When the subprime debt market defaulted money the banks should have received as repayment from lenders was not paid reducing the funds available to give investors making withdrawals.This is nuts!!! Whether or not lenders repay their loans is completely disconnected from whether depositors will be able to withdraw their money. Throughout, you seem to have confused depositors with investors. Investors incur risk of loss, Depositors do not. Investors don't make "withdrawals," they sell their investment at a price greater or less than what they paid for it.
There was a bank run in England around the time the article was written it was Northern Rock, so it has happened. In terms of the fractional reserve banking aspect of the shortage of money in banks' reserves, the reserves have been expanded and funds have been made available to make sure the banks can cover withdrawals. However banks are dependent on the money they receive from the inflow their investments receive.
The problem came when the inflow the banks received declined due to the high default rate and an insufficient reserve requirement being set preventing the banks from being able to pay the withdrawals demanded by the depositors. The money held in QE funds are there to protect against this low reserve risk and the chance of a high default rate occurring again, which would leave the banks with a shortfall of cash if depositors want their money.
The QE funds cannot be used to lend to new customers without losing this money cushion, which is there to primarily cover the low reserve holdings and secondly to cover the risk of low cash inflow created by a high default rate. In short the QE funds protect against the risk of another credit default by making sure banks have excess reserves available in the future if the cash inflows are not paid, lending out the QE funds will cost this security mechanism.
M
morganist
Let me just make a few comments comments. To begin, the statements, such as the one immediately below, you made are reflective of pre-1930s banking and are is astoundingly wrong today:
Due to the bank only holding a small percentage of the invested funds at one time, to maximise lending and boost profits, it is impossible to pay all of the investors the money they invested back in one go. When the investors demand their money and the bank cannot pay the bank fails.
Why is the statement horribly wrong?. Banks can fail, so that's not wrong. What's wrong is it suggests that depositors can't get their money because of fractional reserve banking. Nothing could be further from the truth. Fractional reserve banking is the grease of commerce, and it is what makes modern economies hum on all four cylinders, so to speak, and greatly facilitates the advancement of mankind in science and the arts.
In the United States, and I would imagine in the UK as well, an old fashioned run on the bank where depositors are not able to withdraw their money can not happen! There is zero possibility of any depositor, up to the insured limit, not being able to get their money out of any U.S. bank, whether the bank is solvent or not!!! That is what the banking acts of the 1930s were all about. In the worst cases there could be very slight delays, but even that is unlikely. So you can forget this nonsense of a "run on the bank". In that regard your thinking is 80+ years out of date. Fractional reserve banking has absolutely no affect on whether depositors can withdraw their money at any time. They can. Why you insist on this pre-1930s thinking, I do not understand.
You also made this bizarre statement:
When the subprime debt market defaulted money the banks should have received as repayment from lenders was not paid reducing the funds available to give investors making withdrawals.This is nuts!!! Whether or not lenders repay their loans is completely disconnected from whether depositors will be able to withdraw their money. Throughout, you seem to have confused depositors with investors. Investors incur risk of loss, Depositors do not. Investors don't make "withdrawals," they sell their investment at a price greater or less than what they paid for it.
The argument you are making is self defeating. You seem to be claiming depositors can always get their money out. This is only made possible through the QE fund reserve extension, if this was taken away then depositors would no longer be guaranteed the ability to withdraw all of their money.
The original posts in this thread were asking, Why the extended QE funds could not be used to lend out to people with low interest rates? The answer to this is simple, those funds are there to cushion the risk of a high demand for withdrawals and the loss of that facility could come at the cost of a inability to pay out the money demanded by depositors.
M
morganist
Let me just make a few comments comments. To begin, the statements, such as the one immediately below, you made are reflective of pre-1930s banking and are is astoundingly wrong today:
Due to the bank only holding a small percentage of the invested funds at one time, to maximise lending and boost profits, it is impossible to pay all of the investors the money they invested back in one go. When the investors demand their money and the bank cannot pay the bank fails.
Why is the statement horribly wrong?. Banks can fail, so that's not wrong. What's wrong is it suggests that depositors can't get their money because of fractional reserve banking. Nothing could be further from the truth. Fractional reserve banking is the grease of commerce, and it is what makes modern economies hum on all four cylinders, so to speak, and greatly facilitates the advancement of mankind in science and the arts.
In the United States, and I would imagine in the UK as well, an old fashioned run on the bank where depositors are not able to withdraw their money can not happen! There is zero possibility of any depositor, up to the insured limit, not being able to get their money out of any U.S. bank, whether the bank is solvent or not!!! That is what the banking acts of the 1930s were all about. In the worst cases there could be very slight delays, but even that is unlikely. So you can forget this nonsense of a "run on the bank". In that regard your thinking is 80+ years out of date. Fractional reserve banking has absolutely no affect on whether depositors can withdraw their money at any time. They can. Why you insist on this pre-1930s thinking, I do not understand.
You also made this bizarre statement:
When the subprime debt market defaulted money the banks should have received as repayment from lenders was not paid reducing the funds available to give investors making withdrawals.This is nuts!!! Whether or not lenders repay their loans is completely disconnected from whether depositors will be able to withdraw their money. Throughout, you seem to have confused depositors with investors. Investors incur risk of loss, Depositors do not. Investors don't make "withdrawals," they sell their investment at a price greater or less than what they paid for it.
By investors I meant people who put money in the bank and want to withdraw it. When you pay money into a bank it is an investment, even if it is only for a short period of time. Depositors are investors into current accounts and short term saving accounts, they receive return from their investments. They are also liable to lose money, in the United Kingdom the collapse of Northern Rock lost people money.
I believe Lehman Brothers was the same in America, this is the risk that all depositors or investors make. There is now a guarantee in the United Kingdom to make sure depositors or investors receive a certain amount of their savings in their bank if it fails. There is still a limit on it so they could lose if the credit crunch happened again. The QE funds held are now there to make sure the banks are protected against the loss of inflow and low reserves.
By investors I meant people who put money in the bank and want to withdraw it. When you pay money into a bank it is an investment, even if it is only for a short period of time. Depositors are investors into current accounts and short term saving accounts, they receive return from their investments. They are also liable to lose money, in the United Kingdom the collapse of Northern Rock lost people money.
I believe Lehman Brothers was the same in America, this is the risk that all depositors or investors make. There is now a guarantee in the United Kingdom to make sure depositors or investors receive a certain amount of their savings in their bank if it fails. There is still a limit on it so they could lose if the credit crunch happened again. The QE funds held are now there to make sure the banks are protected against the loss of inflow and low reserves.
No, No, No. Depositors in the U.S. are protected up to the limit of FIDC insurance. In fact during the financial crisis the limit of protection was raised well above 250K -- was it a million?. Depositors have NO RISK. Depositors and Investors are not the same thing. And no, people do not deposit money into a bank savings or checking account as an investment. They do it as a convenience to facilitate financial transactions, and in the case of savings accounts as an interest paying, risk free alternative to hoarding cash -- which is also one of the roles played by Treasury Bonds ... And regardless, in the U.S., a Banks reserve position, or even its solvency, has nothing to do with the safety of depositors' money. But, of course, a Bank's solvency is critical to the safety of investors' investments in the Bank. Those who buy a Bank's equities are investors in that Bank! I own J.P. Morgan Chase common stock. I am invested in that Bank. My entire investment is at risk, should the Bank fail. The depositors, by contrast, will be unhurt. In fact, when a bank fails in the U.S., its depositors may not experience anything other than the bank's closing on Friday under one name and opening on Monday as a Branch of another bank.
Lehman Brothers was an Investment Bank, not a Commercial Bank. Nevertheless, any FDIC insured account at Lehman Brothers would have been fully protected up to the specified limit. Investments are NOT insured. That's the difference between an investment and a deposit. Deposits have no Risk. There is risk of loss in an investment. And if you don't understand this difference you have no business putting your money other than in an insured account. Regardless, a banks reserve account at the Fed, or fractional reserve banking, has nothing to do with the safety of depositors' accounts.
The reserve accounts of all U.S. banks are, in aggregate, a key part of the mechanism used by the U.S. Fed to target a particular wholesale price of money, i.e., the Fed Funds Rate, and they also facilitate day to day clearing transactions. In some other countries there isn't any reserve requirement -- Canada, Australia, for example. Those countries use a different mechanism to target the price of money; Yet even in those countries without a reserve requirement, depositors bear no risk. Virtually everything you wrote about a "run on the bank" is incorrect. You should delete those comments from your website if you don't want to be laughed at.
One more thing, in regard to QE, this statement of yours is emphatically wrong..
The QE funds held are now there to make sure the banks are protected against the loss of inflow and low reserves.
Frankly, reading your website is like experiencing a time warp back to the 19th Century.
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None of this is correct with regard to U.S. Commercial Banks and I doubt it is with regard to UK banks as well.The argument you are making is self defeating. You seem to be claiming depositors can always get their money out. This is only made possible through the QE fund reserve extension, if this was taken away then depositors would no longer be guaranteed the ability to withdraw all of their money.
The original posts in this thread were asking, Why the extended QE funds could not be used to lend out to people with low interest rates? The answer to this is simple, those funds are there to cushion the risk of a high demand for withdrawals and the loss of that facility could come at the cost of a inability to pay out the money demanded by depositors.
Assuming a U.S. Bank is solvent,i.e., their liabilities do not exceed their assets, they will have no problem meeting their reserve requirement when they want to make a new loan. The new loan is a bank asset. They will borrow against this asset as needed to meet their reserve requirement . They need only borrow a small fraction of the face amount of the loan in any case, and they will borrow at a rate well below the rate of return on the loan. No loan officer looks at the bank's reserve account before they make a new loan. They make the loan knowing that any additional reserve requirement that may result can be met. If for some reason they can't borrow from another bank, the Fed will assure that they can meet their reserve requirement via the discount window facility. But regardless they will be able to meet their reserve requirement so long as they are solvent. In other words, if there is a qualified credit demand in the private sector, the Fed will assure that the necessary liquidity is their to meet the demand.
You should understand that banks typically do not want to carry any excess reserves at all, because under normal economic circumstances excess reserves represent a non-earning asset to the bank. Ideally they want their excess reserves to be as close to zero as possible. In turn, the Fed wants the aggregate excess reserves to be zero to achieve it's funds rate target! When aggregate bank reserves are swollen due to QE, the funds rate is driven rapidly toward zero, and the demand for loans is insufficient to absorb the aggregate excess reserves. If the Fed desires to keep the funds rate from being driven all the way to zero, they will pay a small interest on excess reserves to put a floor under the funds rate.
The liquidity coverage ratio requirement was added after the financial crisis to make sure banks carried enough high quality assets to meet their cash flow requirements in a pinch. This means that the assets have to be easily convertible to cash, i.e., of high liquidity. I think there was a motive other than protection of depositors at work here, because as I have already pointed out, depositors are protected in any case. I think the LCR requirement was mainly an effort to cut down of speculative forays of commercial banks into lower quality investments of questionable liquidity. The Fed and other Central banks don't want to see a repeat of the last financial crisis where commercial banks took on way too much risk in their investment strategies. As Martinghoul pointed out, excess reserves certainly would qualify as a liquid high quality asset in meeting the banks LCR requirement, and there may indeed be circumstances where a bank may be forced to carry excess reserves for that purpose. In general though, Banks will, if they can, want to find ways of meeting their LCR requirement using higher yielding liquid assets then excess reserves. As I mentioned above, from the bankers viewpoint, they prefer not to have any excess reserves because the Fed interest on excess reserves is so low as to discourage their accumulation. The Fed wants banks to put excess reserves to work in the economy -- easier said than done, however, in the throes of a serious recession when demand for loans has dried up and everyone is deleveraging.
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M
morganist
No, No, No. Depositors in the U.S. are protected up to the limit of FIDC insurance. In fact during the financial crisis the limit of protection was raised well above 250K -- was it a million?. Depositors have NO RISK. Depositors and Investors are not the same thing. And no, people do not deposit money into a bank savings or checking account as an investment. They do it as a convenience to facilitate financial transactions, and in the case of savings accounts as an interest paying, risk free alternative to hoarding cash -- which is also one of the roles played by Treasury Bonds ... And regardless, in the U.S., a Banks reserve position, or even its solvency, has nothing to do with the safety of depositors' money. But, of course, a Bank's solvency is critical to the safety of investors' investments in the Bank. Those who buy a Bank's equities are investors in that Bank! I own J.P. Morgan Chase common stock. I am invested in that Bank. My entire investment is at risk, should the Bank fail. The depositors, by contrast, will be unhurt. In fact, when a bank fails in the U.S., its depositors may not experience anything other than the bank's closing on Friday under one name and opening on Monday as a Branch of another bank.
Lehman Brothers was an Investment Bank, not a Commercial Bank. Nevertheless, any FDIC insured account at Lehman Brothers would have been fully protected up to the specified limit. Investments are NOT insured. That's the difference between an investment and a deposit. Deposits have no Risk. There is risk of loss in an investment. And if you don't understand this difference you have no business putting your money other than in an insured account. Regardless, a banks reserve account at the Fed, or fractional reserve banking, has nothing to do with the safety of depositors' accounts.
The reserve accounts of all U.S. banks are, in aggregate, a key part of the mechanism used by the U.S. Fed to target a particular wholesale price of money, i.e., the Fed Funds Rate, and they also facilitate day to day clearing transactions. In some other countries there isn't any reserve requirement -- Canada, Australia, for example. Those countries use a different mechanism to target the price of money; Yet even in those countries without a reserve requirement, depositors bear no risk. Virtually everything you wrote about a "run on the bank" is incorrect. You should delete those comments from your website if you don't want to be laughed at.
One more thing, in regard to QE, this statement of yours is emphatically wrong..
The QE funds held are now there to make sure the banks are protected against the loss of inflow and low reserves.
Frankly, reading your website is like experiencing a time warp back to the 19th Century.
I think it is acceptable to consider depositors as investors as they recieve interest from current accounts. They do receive a return for the money they hold in their account so I deem the terminology as at least acceptable, if not fully accurate. I understand you are differentiating between the equity or corporate bond investment catergory, which would be ownership investment as opposed to short term personal finance investment. As current accounts receive interest and the funds deposited in them are classified as assets they would be considered investments, if there was an inability to pay the deposited funds back it would cause a loss of assets and investment capital. The terminology is correct in the context the article is written in.
In regards to whether the American banks are fully covered against the loss of investment or as you state depositor funds I am sure you are correct, however the point I am making is the QE funds the banks cannot lend out is the mechanism that protects depositor funds and their ability to withdraw. You cannot have a guarantee to cover depositors' withdrawals and then take away the funds put aside to make those withdrawal possible. The further lending using those saved reserves would take that emergency facility away from the bank. This is original question asked in the thread and the answer is it would take the protection of depositor withdrawal guarantee away if the QE funds were lent out. I terms of the article it was correct at the time and it relates to the British banking system that saw a bank run at northern rock.
https://www.bbc.co.uk/news/business-41229513
M
morganist
None of this is correct with regard to U.S. Commercial Banks and I doubt it is with regard to UK banks as well.
Assuming a U.S. Bank is solvent,i.e., their liabilities do not exceed their assets, they will have no problem meeting their reserve requirement when they want to make a new loan. The new loan is a bank asset. They will borrow against this asset as needed to meet their reserve requirement . They need only borrow a small fraction of the face amount of the loan in any case, and they will borrow at a rate well below the rate of return on the loan. No loan officer looks at the bank's reserve account before they make a new loan. They make the loan knowing that any additional reserve requirement that may result can be met. If for some reason they can't borrow from another bank, the Fed will assure that they can meet their reserve requirement via the discount window facility. But regardless they will be able to meet their reserve requirement so long as they are solvent. In other words, if there is a qualified credit demand in the private sector, the Fed will assure that the necessary liquidity is their to meet the demand.
You should understand that banks typically do not want to carry any excess reserves at all, because under normal economic circumstances excess reserves represent a non-earning asset to the bank. Ideally they want their excess reserves to be as close to zero as possible. In turn, the Fed wants the aggregate excess reserves to be zero to achieve it's funds rate target! When aggregate bank reserves are swollen due to QE, the funds rate is driven rapidly toward zero, and the demand for loans is insufficient to absorb the aggregate excess reserves. If the Fed desires to keep the funds rate from being driven all the way to zero, they will pay a small interest on excess reserves to put a floor under the funds rate.
The liquidity coverage ratio requirement was added after the financial crisis to make sure banks carried enough high quality assets to meet their cash flow requirements in a pinch. This means that the assets have to be easily convertible to cash, i.e., of high liquidity. I think there was a motive other than protection of depositors at work here, because as I have already pointed out, depositors are protected in any case. I think the LCR requirement was mainly an effort to cut down of speculative forays of commercial banks into lower quality investments of questionable liquidity. The Fed and other Central banks don't want to see a repeat of the last financial crisis where commercial banks took on way too much risk in their investment strategies. As Martinghoul pointed out, excess reserves certainly would qualify as a liquid high quality asset in meeting the banks LCR requirement, and there may indeed be circumstances where a bank may be forced to carry excess reserves for that purpose. In general though, Banks will, if they can, want to find ways of meeting their LCR requirement using higher yielding liquid assets then excess reserves. As I mentioned above, from the bankers viewpoint, they prefer not to have any excess reserves because the Fed interest on excess reserves is so low as to discourage their accumulation. The Fed wants banks to put excess reserves to work in the economy -- easier said than done, however, in the throes of a serious recession when demand for loans has dried up and everyone is deleveraging.
The problem in the United Kingdom came about when the banks did not receive the funds they were expected to be paid from loans they have given out or the loans defaulted entirely. The banks did not have sufficient funds in their accounts to be able to pay out the withdrawals required by the depositors and the central bank would not lend further funds to the banks to enable to the withdrawals to be made.
The government had to step in and provide emergency funding to enable depositors to get their investments back, although even then some people lost money they had paid into the banks. This is what happened in the United Kingdom the article is correct in terms of the what happened with Northern Rock and some other banks too. Yes you are correct some people lost equity or corporate bonds investments they had in the banks too however there was definitely a bank run.
I understand it is different in America I appreciate that and I understand there are mechanisms to prevent this scenario. The point I am making is that if the funds set aside to cover the depositors' withdrawal is lent out then it takes away the very reserve cushion which has been provided to enable the American banking system's depositor withdrawal guarantee. The question at the beginning of this thread was, Why the QE funds could not be lent out? This my answer.
Yes, that is your point. And it is dead wrong. Banks can lend out excess reserves that result from QE. I am beginning to think that you believe that QE involves giving money to banks!!! You do not seem to understand much at all about QE. First, the funds that tend to swell banks reserve accounts during a time of active QE by a central bank come from the purchase by the central bank of government bonds held in the private sector, or, in the case of the recent financial crisis, certain other bonds that were classified as "troubled bank assets." The Fed agreed to purchase these troubled assets and in turn credit the banks' reserve accounts.the point I am making is the QE funds the banks cannot lend out is the mechanism that protects depositor funds and their ability to withdraw.
A bank's reserve also includes vault cash. Normally a bank has sufficient vault cash to satisfy any depositor who desires to make a cash withdrawal. If they happen to have excess reserves, which are very liquid, they can quickly convert any part of their excess reserve to cash if needed, but they are not required to carry excess reserves, nor do they want to, nor does the fed want them to. Period!!! By definition, solvent, well capitalized banks have enough assets to facilitate returning all deposits to the depositors. They can quickly convert sufficient assets to cash as needed! If you want to see what kinds of assets banks typically hold, just examine any banks balance sheet. You will see that if the bank is solvent its assets equal its liabilities.
Of course banks can get into trouble if they hold too many non-performing loans. They can fail, and do on occasion. No depositor is at risk however. A problem can arise if a bank's assets are insufficiently liquid in a crisis, or if a bank is under-capitalized, and that is what Dodd Frank, Fed regulations, and stress testing is about. But the bottom line is: a) the fed has infinite resources, b) no depositor is at risk, and c) banks are NOT required to retain excess reserves to pay depositors.
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