Here you are talking about non-performing loans. Yes, too many non-performing loans can cause a bank failure. But the central bank will step in in that situation, at least in the U.S. and I am sure the situation is similar in the UK, and the failing bank will undergo resolution. The depositors will be protected, but the investors will lose all or part of their investment, as they should.. Nevertheless, you are spouting nonsense with regard to excess reserves. And your confusion of depositors with investors in not helping.
Interest Rate Hikes and Quantitative Easing
- Thread starter kmiklas
- Start date
If they lost money they were either investors in bank instruments that were not insured against bank failure, or possibly they were depositors who had deposited money above the insured limit. Or something else? As I have emphasized, and as you said, regular depositors did not lose any of their money! This is Not a Bank run in anything like the classical sense. You are just spouting nonsense. When a bank is failing, it is understandable that investors, particularly those with a lot of money at stake, will rally their legal forces and attempt to recover as much of their investment as possible, but this is not a run on the bank anything like that that occurred in the early period of the Great Depression.
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morganist
I understand that it is different in America but in the United Kingdom the scenario you yourself explain is exactly what happened at Northern Rock, which is what my article explained. My original point, which is what the thread was about to start with is why can they not lend the QE funds out. I still stand by the argument that those QE funds are there to protect against that scenario happening in America and the over use of those funds could take that facility away.
Does the UK have a reserve requirement?. As I mentioned earlier some countries use a different mechanism to control what is the equivalent of the U.S. Funds rate. In the U.S. banks can of course loan out excess reserves, and indeed they want to. One of Bernanke's frustrations during the great recession was the swollen bank reserves that banks could not lend because the demand for loans had dried up. The Central bank of course wants this money to be used to expand credit. These difficulties are simply a reflection of how ineffective lowering interest rates can be in spurring demand. It is a help but the demand for credit is largely out of the hands of the Fed.
About this:
I still stand by the argument that those QE funds are there to protect against that scenario happening in America and the over use of those funds could take that facility away.
You are completely incorrect. A well capitalized solvent bank already has enough assets to meet its liabilities.* Those QE funds find themselves into reserve accounts simply because that is the way the banking system operates. For example, let's say you as an individual sell a bond to the Fed, and you deposit the proceeds in the form of a check in your bank account. Your bank will credit your account and the Fed, overnight, will credit your bank's reserve account. Your account is your bank's liability, and your bank's reserve account is their asset.
When the federal reserve buys a lot of bonds during QE they are intentionally increasing aggregate reserve balances to force down the Fed funds rate. It is no more complicated than that. But because this activity takes place in a recession, demand for loans naturally decreases and banks have trouble finding enough qualified borrowers to absorb this sudden onslaught of reserve excess. The result is that aggregate bank reserves rise and the funds rate is pushed rapidly toward zero and the yield on Treasuries falls. It is no more complicated than that. Your bank would like to loan these excess reserves out at the highest yield it can, but it isn't easy to do that in the midst of a deep recession!
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*In the Great Recession, some of the assets of otherwise well capitalized banks became illiquid. In an operation separate from QE -- in QE the Fed only bought Treasuries -- the Fed agreed to buy discounted, illiquid, but by no means worthless, assets from banks. In as much as the reserve accounts that were credited as a result of this operation are completely liquid, the banks could now meet their capitalization remarks,i.e., their assets could now be marked to market. There was no longer a question about these particular banks' solvencies.
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I just read the article you gave a link to. I was completely right. You were completely wrong. There was no run on Northern Rock, or whatever that bank was called. The only mention of people losing money were investors in what was apparently Northern Rock stock! There is no mention of depositors losing any money. There was no run on the bank, even though a journalist used that term. Because there is a line of fearful, uninformed people, almost certainly depositors, outside the bank, does not mean they did not get their checking and savings account deposits returned to them. There is no run on this bank, just a line of fearful, uninformed depositors, and a journalist who like yourself did not understand what a run on the bank means and what led to actual runs on banks during the great depression and in the 19th century. .
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morganist
This is part of the problem in the UK the Central Bank defaulted on its obligation to act as lender of last resort, which caused a really big problem. I wrote another article about it called Is the Bank of England a Failed Institution. I admit I may have got the situation incorrect for the US, although I still think the lending out of the QE funds could at least limit protections to either depositors or investors. In terms of the UK the situation I explain in the articles was unfortunately accurate. See below.
http://morganisteconomics.blogspot....led-institution.html?q=is+the+bank+of+england
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morganist
There was definitely a run on Northern Rock. The article below is a timeline. The article was correct. The government had to intervene and the Bank of England failed its obligation. The only reason depositors received their money back was because the government intervened so the central bank system failed.
https://www.theguardian.com/business/2008/mar/26/northernrock
In any event there was another case when depositors lost money the article below explains.
https://www.thisismoney.co.uk/money...money-government-wont-rescue-failed-bank.html
The UK switched from a central bank depositor and investor protection system to a governmental system, which only offers limited protection.
Bank Run, when depositors withdraw their money from the bank on mass. This happened at Northern Rock.
Bank Bailout, when the central bank intervenes to act as lender of last resort. This did not happen so the government had to intervene, the central bank failed its obligation.
Bank Default, when the investors lost their investments due to the bank being unable to pay. This happened at Northern Rock.
In short there was a bank run at Northern Rock the central bank failed its duty as lender of last resort. The government had to step in and cover the depositors withdrawals and investors in Northern Rock lost money. This is what happened in the United Kingdom and on top of that there was a subsequent failure to pay depositors their money at another bank because it exceeded the governments deposit protection guarantee. I have updated the original article I put up to clarify the situation. I changed some of the terms for investors to depositors to make it clear. I have linked to it below.
http://morganisteconomics.blogspot....-and-bank-run-there-is.html?q=credit+crunches
Ironically my conclusion agrees with you bank runs are not the problem it was the credit crunch that the article is really about. Anyway it explains the bank run at Northern Rock and the other bank and how bad the process is or was in the United Kingdom.
This is a misunderstanding on your part with regard to at least the way depositors are protected in the U.S. In the U.S. Banks pay an insurance premium to the Federal Deposit Insurance Corporation. This is a government backed independent agency of the government that insures bank deposits.
Also you should understand that properly capitalized banks whose liabilities do not exceed their assets are by definition able to pay off their depositors, QE or no QE.
I am quite sure the situation is very similar in the UK.
Now of course Banks do fail, and it is usually because they have too many non-performing loans. That has nothing to do with QE however.
Now to your remark:
The only reason depositors received their money back was because the government intervened so the central bank system failed.
This makes zero sense to me. There was a bank failure in the UK. The Central Bank stepped in and resolved the situation. The depositors were protected and the investors lost money. That is exactly what is supposed to happen! As I see it, your UK central bank did exactly as they should have done.
If you want to try and convince me that the UK central bank failed in some way, you'll have to be very specific, because I don't see any failure of the central bank here, unless it was a failure to properly regulate under the rules. And you have given me no evidence for that. Perhaps regulations on UK banks needs to be tightened up.
But what on earth does any of this have to do with QE???
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So you are using a different definition of "Run on the bank" then. OK fine. whatever. In the runs on banks of old, depositors often did not get all their money back. In the U.S. those days are long gone. And they are in the UK too apparently since in your kind of bank run depositors got their money.
Look. I just read the additional link you gave me. The situation there is precisely the same as it is in the U.S. This is not a failure of the Bank of England, its a failure of those stupid depositors that deposited money above the insured limit. I have to brake this conversation off. You are driving me crazy with this nonsense.
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morganist
So you are using a different definition of "Run on the bank" then. OK fine. whatever. In the runs on banks of old, depositors often did not get all their money back. In the U.S. those days are long gone. And they are in the UK too apparently since in your kind of bank run depositors got their money.
Look. I just read the additional link you gave me. The situation there is precisely the same as it is in the U.S. This is not a failure of the Bank of England, its a failure of those stupid depositors that deposited money above the insured limit. I have to brake this conversation off. You are driving me crazy with this nonsense.
Fair enough, but in terms of how it was in the UK and the definitions of the term bank run I have got it correct. I did update the article to make it clearer.