Why do we need private banks at all? | 133 comments (133 topical, editorial, 0 hidden)

Re: Why do we need private banks at all? (none / 0)

As has been pointed out elsewhere on this thread, lending is not done from deposits.

In fact, lending creates deposits.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Feb 28th, 2012 at 05:48:54 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

What do you think Santander does with my euro deposit? Puts it in a mattress?

by rootless2 on Tue Feb 28th, 2012 at 05:55:32 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Why are you talking about Santander, of all banks?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Feb 28th, 2012 at 06:19:29 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

random.

by rootless2 on Tue Feb 28th, 2012 at 06:32:06 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

It holds it as custodian and pays interest on it.

Now suppose you apply for a loan. When the bank credits your account with the amount of the loan, that increases the deposit base of the bank and increases the amount of your deposit without you actually bringing in any cash or transferring balances from another bank. Therefore, loans create deposits.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Feb 28th, 2012 at 06:24:29 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

That would be a very strange business model. Take cash from customers, put the cash in a vault, pay the customer. Seems highly unprofitable. Why in the world would anyone go into such a business?

Why would anyone need deposit insurance in such a case?

As for the loan, what happens when I spend the money on my new Velocicopter. The Velocicopter company is not interested in what I have on deposit, they want cash. Where does that cash come from?

by rootless2 on Tue Feb 28th, 2012 at 06:31:16 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

The velocicopter company also has a bank account. It you pay electronically or by cheque, no cash changes hands, just accounting annotations get made.

In any case you are aware that there isn't enough cash in existence to cash out all deposits? In other words, cash is just a collection of government-certified tokens issued in sufficient amount to cover people's demand for pocket money.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Feb 28th, 2012 at 06:51:31 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

an infinite number of turtles all the way down.

That's really not how it works.

by rootless2 on Tue Feb 28th, 2012 at 08:49:20 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

That would be a very strange business model. Take cash from customers, put the cash in a vault, pay the customer. Seems highly unprofitable. Why in the world would anyone go into such a business?

Profit comes from giving people loans. Deposits are a way to get people in through the door so you can sell them the loan.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Feb 28th, 2012 at 06:52:47 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Generating 74 percent of total payments related
income, current accounts (known as
DDA in the United States) are the core of
the European payments business. In 2007,
retail current accounts contributed €39 billion
in profit, mainly from interest on balances,
out of total payments-related profit
of €68 billion. Corporate accounts added
another €11 billion.

http://www.mckinsey.com/clientservice/Financial_Services/Knowledge_Highlights/Recent_Reports/~/media /Reports/Financial_Services/FS_Current%20accounts%20in%20Europe_MoP7.ashx

We are currently in a weird situation where banks do not have many places to invest deposits profitably.
http://www.nytimes.com/2011/10/25/business/banks-flooded-with-cash-they-cant-profitably-use.html?pag ewanted=all

But your model of how depository banks work is wrong.

by rootless2 on Tue Feb 28th, 2012 at 07:59:43 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

But your model of how depository banks work is wrong.

Not that I expect you to revise that, but anyway, here are two post you could read about it.

Naked Capitalism: Banks are not reserve constrained

Some people still believe in the money multiplier taught in old economic textbooks that fractional reserve banking has banks taking deposits, multiplying them as much as possible, subject to the reserve ratio, and making a much larger amount loans. That is not how it works. In practice, banks don't wait for the reserves to be available to issue loans. They make loans first and then borrow the reserves in the interbank market. The loans come first, not the reserves.
Banks are never constrained by reserves or reserve ratios. Banks are capital constrained. In our fiat money system, the central bank uses reserves in the system to help the it hit a target interest rate. So, the central bank provides the system with enough reserves to meet any reserve ratio at its target rate. The reserves are about helping set interest rates, not about pyramiding money on a reserve base.
Understanding this should also help you understand why QE has been a boon for financial speculation but a bust in the real economy:

Steve Keen's Debtwatch: Dude! Where's My Recovery? (June 11th, 2011)

Lest it be said that I'm parodying neoclassical economics, or relying on what lesser lights believe when the leaders of the profession know better, here are two apposite quotes from Ben Bernanke and Paul Krugman.
...
They are profoundly wrong on this point because neoclassical economists do not understand how money is created by the private banking system--despite decades of empirical research to the contrary, they continue to cling to the textbook vision of banks as mere intermediaries between savers and borrowers.
This is bizarre, since as long as 4 decades ago, the actual situation was put very simply by the then Senior Vice President, Federal Reserve Bank of New York, Alan Holmes. Holmes explained why the then faddish Monetarist policy of controlling inflation by controlling the growth of Base Money had failed, saying that it suffered from "a naive assumption" that:
the banking system only expands loans after the [Federal Reserve] System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt. (Alan R. Holmes, 1969, p. 73; emphasis added)
The empirical fact that "loans create deposits" means that the change in the level of private debt is matched by a change in the level of money, which boosts aggregate demand. The level of private debt therefore cannot be ignored--and the fact that neoclassical economists did ignore it (and, with the likes of Greenspan running the Fed, actively promoted its growth) is why this is no "garden variety" downturn.

Yes, Dorothy, it's turtles all the way down and no, we're not in Kansas any more.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 06:16:15 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

But that is addressing a very different point. That bank lending is not limited strictly by deposits does not imply banks don't need any capital or that they do not rely on low cost deposits as a source of capital. Goldman-Sachs is selling CD notes, FDIC insured CD notes, precisely to raise capital. Those deposits are a source of cash which can then be turned into other assets.

Do you think McKinsey is just making it up? Do you think that Citibank has $1trillion in notes just sitting in a vault?

by rootless2 on Wed Feb 29th, 2012 at 08:14:51 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

And again: That is arbitrage against the discount window, not against Goldman's lending.

If Goldman had no solvent customers to lend to, they would still be issuing those. Because they are not issuing them to fund lending, they are issuing them to arbitrage against the discount window (or the interbank market, but that comes to the same thing in the final analysis).

Now, it is certainly possible - in principle - for the central bank to create a high enough spread between the support rate and the main refinancing rate that the absence of solvent customers would disincentivise banks from accepting deposits. But that's not the case today, has not been the case historically, and there is no obvious reason for the central bank to ever do so in the future.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 08:58:04 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Deposits are not "low cost". Especially not now in a "liquidity trap".

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 09:28:43 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

They aren't? Seems my bank is paying a negative real interest rate on my deposits. Seems cheap to me.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Feb 29th, 2012 at 10:09:04 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

But the central bank is paying them a negative real interest rate on their excess reserves, and demanding a negative real interest rate on their rediscounts.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 10:23:19 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

So why don't they increase lending to reduce excess reserves? Because I suppose that's why those reserves are called "excess"?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Mar 1st, 2012 at 05:34:58 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

Because they prefer to lend the cash to the ECB at 0.25% than to the "real economy".

But I repeat myself

We're in a liquidity crisis and banks want to be in an all-cash asset position.

I wonder what would happen if the ECB set the deposit rate (remuneration on excess reserves) to a negative nominal rate.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 05:41:41 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Wow, that was a real brain freeze on my part. :P

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Mar 1st, 2012 at 06:05:02 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

Now you know where the LTRO is ending up: excess reserves.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 08:15:59 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

Soooo... why don't the ECB lower their rates on excess reserves to zero? Or even a negative nominal number? Sure, banks might just then have all that borrowed cash sitting in their electronic vaults (instead of in the electronic vaults of the ECB), but they'll have at least some increased incentives to lend.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Mar 1st, 2012 at 10:03:56 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

Soooo... why don't the ECB lower their rates on excess reserves to zero?

For all practical purposes they have.

They don't do it permanently, because the remuneration rate for excess reserves sets the floor under the interbank rate. Which the CB wants to do if it wants to conduct active interest rate policy. It shouldn't do that IMO (I favour a zero interest rate policy and conducting monetary policy at the exchange rate and margin requirements instead), but that's a subject for another time.

Or even a negative nominal number?

Then the banks would go all-cash. As in, demand a big pile of € 100 bills that they could actually lock in their physical vault. Unless you go full Geselian currency, you can't beat the zero bound on nominal interest rates.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 2nd, 2012 at 04:58:31 AM EST
[ Parent ]

Re: Why do we need private banks at all? (4.00 / 2)

You know, I think I've learnt as much or more reading the ET comment threads than I have my text books.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Mar 1st, 2012 at 10:05:41 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

Though I suppose there is one more place LTRO money is going beside excess reserves: Spanish banks buying Spanish sovereign debt, Portuguese banks buying Portuguese sovereign debt, Italian banks buying Italian sovereign debt, and so on. They'll all go down anyway if their sovereign defaults, as they already hold so much domestic sovereign debt. So they might as well double down and buy more, especially as the ECB is printing money for them to do it. A little upside, no downside.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Mar 1st, 2012 at 10:11:15 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

And then they are repoing the bonds for cash at the LTRO and putting the cash in excess reserves.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 11:19:43 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Can they use that cash to buy even more periphery sovereign bonds, and then repo those bonds for even more cash, and then use that cash... and so on and so on?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Mar 2nd, 2012 at 06:34:09 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Yes.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Mar 2nd, 2012 at 06:46:50 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Wow. That's brilliant. There really are turtles all the way down.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Mar 2nd, 2012 at 07:27:43 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

No, it's called central bank monetization of sovereign debt is illegal but not if it's mediated by private banks. Also known as transsubstantiation religious bollocks.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Mar 2nd, 2012 at 07:30:16 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Shhhh! Someone Serious might hear you!

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Mar 2nd, 2012 at 07:32:45 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

Transsubstantiation stands on not a few outsize turtles...

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Mar 2nd, 2012 at 08:09:17 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Or canards, me duck.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Mar 2nd, 2012 at 08:56:29 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Draghi's comments on the press conference today got me thinking a bit more.

14. 23 Some fascinating comments from Draghi -- delivered with obvious relish -- on what he sees as the real potential benefits of the LTRO to the real economy. He stresses that the number of banks tapping the cheap three year finance jumped from some 500 in December to 800 this time. Many of the new takers were small banks in Germany and elsewhere.
I would love to read you the places, the towns, the villages where these banks are but often they would be the only bank in towns so they could be identified. But this tells me one thing - this money is now closer to the small and medium-sized businesses than it was before. I'm not saying this money will necessarily go to SMEs but it is certainly closer. We have this in mind because 80 per cent of eurozone employment is SMEs.

Isn't Draghi right here, that LTRO money could actually end up in real investment?

Imagine a fundamentally solvent European bank, ie a bank without periphery sovereign debt all over its balance sheet. Imaging that this bank has a number of customers who want to borrow money for certain projects, say a mine or a wind power project. Given the risk for the bank inherent in the project, the bank want the money bank back in three years, and a margin of at least 10 %. The bank can currently raise money at a cost of 4 %, and hence demand an interest rate of 14 % on the loan to issue it. This rate of interest turns the net present value of the project negative, so no loan is made and the project doesn't happen.

Imagine instead that the bank pledges some of its quality assets to the ECB and gets to borrow at 1 %. Hence, they only demand 11 % interest from the developer, which turns the NPV positive, the money is lent, the project happens and demand increases.

Or am I missing something here?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Mar 8th, 2012 at 11:47:36 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Isn't Draghi right here, that LTRO money could actually end up in real investment?

It's not really the LTRO money. The key here is 8 December 2011 - ECB announces measures to support bank lending and money market activity

The NCBs are allowed, as a temporary solution, to accept as collateral for Eurosystem credit operations additional performing credit claims that satisfy specific eligibility criteria. The responsibility entailed in the acceptance of such credit claims will be borne by the NCB authorising their use. Details of the criteria for the use of credit claims will be announced in due course.

I.e., banks could potentially give loans and use those loans as collateral for liquidity directly with their national central bank, not just at the LTROs but at the weekly liquidity auctions.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Thu Mar 8th, 2012 at 12:05:26 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Well, shouldn't that work in some cases, and give lower interest rate costs to companies, and hence make more projects NPV-positive?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Mar 8th, 2012 at 12:09:30 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

No reason why it shouldn't. See my Rediscovering Minsky's wheel, one pundit at a time (May 9th, 2011) and JakeS' The trouble with [talking about] banking (May 13th, 2011) for more on that.

Also, Steve Keen's Dude! Where's My Recovery?

This is bizarre, since as long as 4 decades ago, the actual situation was put very simply by the then Senior Vice President, Federal Reserve Bank of New York, Alan Holmes. Holmes explained why the then faddish Monetarist policy of controlling inflation by controlling the growth of Base Money had failed, saying that it suffered from "a naive assumption" that:

The banking system only expands loans after the [Federal Reserve] System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt. (Alan R. Holmes, 1969, p. 73; emphasis added)
The empirical fact that "loans create deposits" means that the change in the level of private debt is matched by a change in the level of money, which boosts aggregate demand. The level of private debt therefore cannot be ignored--and the fact that neoclassical economists did ignore it (and, with the likes of Greenspan running the Fed, actively promoted its growth) is why this is no "garden variety" downturn.
In all the post-WWII recessions on which Lazear's regression was based, the downturn ended when the growth of private debt turned positive again and boosted aggregate demand. This of itself is not a bad thing: as Schumpeter argued decades ago, in a well-functioning capitalist system, the main recipients of credit are entrepreneurs who have an idea, but not the money needed to put it into action:

[I]n so far as credit cannot be given out of the results of past enterprise ... it can only consist of credit means of payment created ad hoc, which can be backed neither by money in the strict sense nor by products already in existence...
It provides us with the connection between lending and credit means of payment, and leads us to what I regard as the nature of the credit phenomenon... credit is essentially the creation of purchasing power for the purpose of transferring it to the entrepreneur, but not simply the transfer of existing purchasing power." (Joseph Alois Schumpeter, 1934, pp. 106-107)

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Thu Mar 8th, 2012 at 03:42:54 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

But there is an important point insofar as the ECBuBa keeps pretending that it's going to yank away the unlimited tender weekly liquidity before the interbank market has completely unfrozen. And some of the members are crazy enough to actually do it, so it's a threat that has to be taken seriously.

This ensures that the liquidity for a mid-term project won't suddenly disappear in a poof of neo-Hayekian idiocy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 8th, 2012 at 05:33:50 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Well, can they call in the cash at anytime? The repo is over three years, isn't it? That is, ECB only has the right to demand the cash back after three years, not earlier than that.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Mar 9th, 2012 at 10:31:21 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Precisely.

Mig argued that they had already done what you said they were doing when they expanded the eligibility for the MRO.

I agree with you that this has a greater scope, precisely because it can not be revoked with a week's notice. But I also agree with Mig that the scope is not as much greater as the BuBa (wants to) believe.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 9th, 2012 at 11:54:14 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Eurointelligence Daily Briefing: Weidmann says Target 2 imbalances a major concern - calls on Draghi to change collateral rules (01.03.2012)

Angelo Baglioni
Writing in Lavoce, Angelo Baglioni writes that very little of trillion euro LTRO shows is likely to end up with the real economy (a point also made by Fitch Ratings yesterday). He said the sole effect of this operation is to support government bonds. If the ECB were to assume the role of lender of last resort, it would favour a policy to strengthen the traditional banking lending channel. As it stands, however, the economy continues to be weighed down by credit constrains, which will exacerbate the recession.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 05:58:40 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

McKinsey is saying the opposite of what you want to imply:

Current accounts are the cornerstone of the European payments business.

Consumer deposits are part of the payments and clearing system, as JakeS has pointed out.

They provide a stable and inexpensive source of funding for banks,

They're talking about current account, not savings accounts or time deposits. Current accounts don't generally pay interest, therefore they are a cheap source of liquidity ("funding" - see also JakeS's comments) in the amount of their average balance. In the US, checking accounts generally have quite stiff maintenance fees unless minimum balances are maintained. But savings accounts or time deposits pay higher interests and are therefore more expensive. Also, some banks aggressively advertise demand deposits (current accounts) paying high interest rates. Those are an expensive source of funding.

and interest on balances provides the major portion of payments-related income in Europe.

If that's bank income, it must refer to interest charged on negative balances.

As banks' stickiest product, current accounts are an excellent basis for selling other products and building a broad relationship with a customer.

Also mentioned in mine and others' comments

Important challenges loom, however. Even as overall payments revenue is projected to grow from 30 to 35 percent of total banking revenues in Europe between 2007 and 2012, income from current accounts is under attack.

This [bank] income from current accounts must be from charges and fees.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 09:50:01 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

So your claim is that banks in Europe generate 30% of their revenue from charges and fees on current accounts?

by rootless2 on Wed Feb 29th, 2012 at 10:49:38 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

What is your mechanism for banks to generate revenue from deposits?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 10:52:24 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

They lend it.

0% current account deposit of 100 zlotys
5% mortgage for 100 zlotys

Profit!

by rootless2 on Wed Feb 29th, 2012 at 11:12:05 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

The revenue is from the loan, not from the deposit.

And as we've pointed out repeatedly loans don't require deposit. They create deposits.

If I have 100 of your zloty and I lend 100 zloty to Jake, I credit 100 zloty to Jake's account so now you still have your 100 zloty deposit and Jake has a spanking new 100 zloty deposit. So my loan to Jake doubles my deposits from 100 to 200. I am not loaning to Jake from your 100. Your 100 are still available to you, as are Jake's 100.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 11:15:50 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

In order to lend the money to Jake I must meet a reserve cash requirement. Where does that cash come from?

by rootless2 on Wed Feb 29th, 2012 at 11:51:43 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

You can borrow it from another bank. Or you can pledge the loan to Jake as collateral at the central bank in exchange for cash with which to satisfy the reserve requirements. Or you can take deposits.

But you only have to satisfy the reserve requirement after Jake already has his loan. In extremis you will borrow the reserves from the central bank at a penalty rate.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 11:58:39 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

No, you have up to a month to find those regulatory reserves, because regulatory compliance only requires that your average position over the month in question is in excess of the requirement.

But that's actually incidental, because you make the loan to me, and turn around and rediscount the note with the CB on the very same day.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 12:02:19 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

rootless2:

Why in the world would anyone go into such a business?

Well, for one I am not certain that I did get more in interest last year then they nicked in fees, but anyhow there are a couple of possible reasons:

That the government demands it for access to the lucrative borrow from central bank and lend to customers business.
That borrowing from customers is cheaper then borrowing form the central bank when it comes to liquidity demands of the government.
That it brings customers in.

On the third, I do have an account with the bank of my local supermarket chain that did pay interest and have no fees. But then again once I have put money in that bank I am probably more likely to shop at their stores anyway. And with a banking license they can fund their own loans from their own bank, even though they do not appear to lend to anyone else.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Feb 29th, 2012 at 04:14:45 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

1. and 3. are correct. 2. is correct under normal circumstances, but since the Global Financial Clusterfuck there are plenty of deposits being advertised by banks which pay more than the central bank demands for its lending.

The difference is that central bank lending to banks is collateralised quite stringently, whereas customer deposits are not collateralised. In fact, they are guaranteed by the government and the cost to banks of taking part in deposit insurance schemes is rather low.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 06:00:47 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

2. <- is the issue under discussion.

by rootless2 on Wed Feb 29th, 2012 at 08:15:45 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

You need to view this in terms of opportunity costs.

If the bank lends you money, the opportunity cost of that money is the Fed funds rate. This, along with legal limits on how much lending it may pile on top of its equity, is the operational constraint on bank lending. This is irrespective of the rate it pays on deposits, or the volume of deposits.

Yes, it can use deposits to defray that expense, if it can obtain them at less than the Fed funds rate. But if it can obtain deposits at less than the Fed funds rate, it could also just place them in the interbank market or at the discount window to make the Fed funds rate on them. If the bank made no loans at all, it would still be trying to attract those deposits. And if the bank had no depositors, it would not alter one whit the quantity or interest rate of its lending.

OK, in Goldman's case this is not true. Goldman doesn't take deposits because of a business case for taking deposits. Goldman takes deposits so it can hold them hostage if the federal government decides that Goldman needs to go away. But Goldman is special.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 09:14:17 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Discuss: Government bids to bring halt to banks' deposit war (13 April 2011)

Much to the displeasure of the Bank of Spain, the sector has been engaging in a deposit war now for several months in order to improve liquidity after the debt crisis in the euro zone cut off traditional wholesale funding sources for many lenders.
Some banks are offering annual deposit rates of 4 percent, thereby, narrowing their margins and restricting their ability to lend. The practice also ends up increasing the borrowing costs of households and companies.
The decree move follows repeated calls by the central bank to put an end to what it feels is a self-defeating practice.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 09:24:50 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

So why do they need "liquidity" if they can just create money as needed?

What does the bank get out of having that cash there?

by rootless2 on Wed Feb 29th, 2012 at 10:42:21 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

Only the central bank can create money as needed.

The other banks can only create the money they lend. When they have to make an actual payment to another bank, they need actual money (i.e., liquidity).

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 10:47:49 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

But previously, you said that what the bank does with my deposit is

"It holds it as custodian and pays interest on it."

So now it is used for interbank payments too?

by rootless2 on Wed Feb 29th, 2012 at 11:13:16 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

The other banks can only create the money they lend. .

Not so, they create money when they spend as well, except that this spent money becomes the object of an (undated) demand deposit in the recipient's current account.

What happens with the (dated) loan is that the money is created, deposited and then instantaneously lent via what is essentially a repo of virtual (fiat 'look-alike') cash.

I find it useful to distinguish between dated and undated deposits.

Banks must always balance - in aggregate - dated (term-even overnight) deposits and dated (loan) assets.

Undated demand deposits (reserves) which are held by banks at the Central Bank are reflected in the balance sheet by:

(a) the (undated) ownership claim of the banks equity capital; and

(b) the (undated) claim of demand depositors in respect of their current account balances.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Feb 29th, 2012 at 11:59:58 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

The central bank pays them interest on the pile of cash. Or the Treasury does, if the CB enforces its target rate by open market operations. Comes to the same thing, though, unless your central bank believes that Treasury notes have cooties, like the ECB does.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 10:53:34 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

So your theory is that they borrow from depositors at 4% and lend to the reserve bank at 1% (actually less).

No wonder they are in trouble.

by rootless2 on Wed Feb 29th, 2012 at 11:01:20 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

No, they borrow (uncollateralised) from depositors at 4% and borrow (collateralised) from the central bank at 1%.

They lend to each other, and to customers, at whatever the respective markets will bear.

And it's not my theory. It is a fact Competition for deposits in 2010-11 got insane and they were offering up to 4% for demand deposits (not time deposits!) which did squeeze margins as they were not increasing what they were charging for their lending in a commensurate way. And so the Central Bank got worried, especially as competition for deposits is a zero-sum game among banks and does not improve the overall health of the banking system.

However, what deposits (as liabilities) do is allow banks to book cash as assets. At a minimum they can park this cash as central bank reserves making a measly 0.25%. And, as assets, central bank reserves and cash don't count as risk weighted assets and therefore don't count in capital adequacy requirements (i.e., they don't imply regulatory or market needs for additional equity) whereas a loan which may collect 7% or upwards as interest income is a risky asset which does count as risk-weighted assets for capital adequacy purposes and does lead to additional equity requirements.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 11:12:16 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

I must be dumb indeed, because here's what I understand Jake to be saying:

the banks borrow from customers at 4%
the banks deposit that money in the central bank at nearly zero interest.

That would make no sense.

At a minimum they can park this cash as central bank reserves making a measly 0.25%. And, as assets, central bank reserves and cash don't count as risk weighted assets and therefore don't count in capital adequacy requirements

So they put some of it in the central bank, which increases their cash asset base which allows them to lend and buy more profitable assets - in theory. But suddenly, the deposit taking doesn't seem like a service business, it seems like a vital part of bank capital management. In order to lend, they must have some cash reserves. And one big source of cash reserves is - deposits!

To me you are taking a true observation: that with access to central bank reserves and fancy accounting, bank lending is not constrained to be a fraction of deposits, and then extending it over the cliff as an argument that deposits don't have any effect on bank lending capability - something you contradict in the quoted sentence above.

by rootless2 on Wed Feb 29th, 2012 at 11:21:06 AM EST
[ Parent ]

Re: Why do we need private banks at all? (4.00 / 2)

Look, before the Global Financial Clusterfuck it was a perfectly viable banking model to fund your lending by borrowing in the interbank market instead of and in preference to deposit-taking.

Then the interbank maket seized and it took with it Northern Rock and Lehman Brothers.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 11:25:34 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

I agree with that, sort of, before the crisis one would read all sorts of snotty comments about the business of retail banking which was so passe and boring. BUT before the boom deposits were the prized and since the bust, suddenly all those juicy deposits look valuable again. They are NOT a service business but a much sought after source of cash which banks obtain at a low rate because of the government subsidy in form of the guarantee. My argument is that there is little public gain in the resulting complex system and guaranteed deposits could simply be provided for by a postal bank or flexible treasury bond system.

by rootless2 on Wed Feb 29th, 2012 at 11:43:48 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

Your conclusion - that the depository function could be handled by a postal bank, or direct participation by the CB - is true.

Everything leading up to it is false, and it won't have the effect on the financial system you think it will. But it's still a good idea for other reasons.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 12:05:17 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

I think the reason deposits are wanted now - and even more so a year or so ago - is that we are living through a continous financial crisis.

US embassy cables: Mervyn King says in March 2008 bailout fund needed | Business | guardian.co.uk

The problem is now not liquidity in the system but rather a question of systemic solvency, Bank of England (BOE) Governor Mervyn King said at a lunch meeting with Treasury Deputy Secretary Robert Kimmitt and Ambassador Tuttle. King said there are two imperatives. First to find ways for banks to avoid the stigma of selling unwanted paper at distressed prices or going to a central bank for assistance.

I understand this to mean that banking as a whole since 2008 is in permanent crisis. This causing stuff like temporarily panics for deposits to short-term meet requirements that would otherwise send them into receivership or to government help centrals.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Feb 29th, 2012 at 02:17:37 PM EST
[ Parent ]

Re: Why do we need private banks at all? (4.00 / 2)

I think the reason deposits are wanted now - and even more so a year or so ago - is that we are living through a continous financial crisis.

We're in a liquidity crisis and banks want to be in an all-cash asset position.

This is what the ECB's LTRO is about: allowing banks to get into an all-cash position for up to 3 years to weather the coming storm. Draghi to banks: winter is coming and it's going to last at least a year.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 04:59:09 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

I must be dumb indeed, because here's what I understand Jake to be saying:

the banks borrow from customers at 4%

the banks deposit that money in the central bank at nearly zero interest.

That would make no sense.

If you can find a bank that'll pay you 4 % on a demand deposit, you should run away very fast because they're most likely desperately papering over their insolvency.

But suddenly, the deposit taking doesn't seem like a service business, it seems like a vital part of bank capital management.

"Large" != "vital."

In order to lend, they must have some cash reserves. And one big source of cash reserves is - deposits!

Not so.

Having extended a loan, they must obtain some cash reserves. They can always do this (so long as they are solvent and the central bank defends a policy rate) by rediscounting the loan with the central bank.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 11:29:53 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

In order to lend, they must have some cash reserves. And one big source of cash reserves is - deposits!
Not so.
Having extended a loan, they must obtain some cash reserves. They can always do this (so long as they are solvent and the central bank defends a policy rate) by rediscounting the loan with the central bank.

ECB: 8 December 2011 - ECB announces measures to support bank lending and money market activity

The NCBs are allowed, as a temporary solution, to accept as collateral for Eurosystem credit operations additional performing credit claims that satisfy specific eligibility criteria. The responsibility entailed in the acceptance of such credit claims will be borne by the NCB authorising their use. Details of the criteria for the use of credit claims will be announced in due course.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 11:32:08 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

It's very easy to find a bank offering 4% on short fixed term deposits - I simply look up the article migeru linked to 3 comments above.

by rootless2 on Wed Feb 29th, 2012 at 11:46:24 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

No, not any more. But it was possible a year ago.

And, again, your point is?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 11:47:30 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

That would make no sense.

I have called it insane. The Spanish Central Bank called it self-defeating and after a year of asking pretty please it issued a directive banning the practice.

So, your point is?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 11:36:27 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

So what was the bank motivation? Just crazy?

by rootless2 on Wed Feb 29th, 2012 at 11:52:31 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Interbank lending dried up and borrowing from the Central Bank carried a stigma. So the banks started a price war. You are familiar with the concept of a price war, and why it's not necessarily a good thing for firms to engage in it, are you not?

In the short term, price wars are good for consumers, who can take advantage of lower prices. Often they are not good for the companies involved. The lower prices reduce profit margins and can threaten their survival.
In the medium to long term, they can be good for the dominant firms in the industry. Typically, the smaller, more marginal, firms cannot compete and must close. The remaining firms absorb the market share of those that have closed. The real losers then, are the marginal firms and their investors. In the long term, the consumer may lose too. With fewer firms in the industry, prices tend to increase, sometimes higher than before the price war started.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 11:56:26 AM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

This is what you claimed banks did with deposits

"It holds it as custodian and pays interest on it."

So the motivation for this price war is somewhat elusive. The prestige of being a custodian and paying interest?

I'm more used to looking businesses that try make profits or at least revenue. This concept of borrowing money from depositors as a beneficent service has me befuddled.

by rootless2 on Wed Feb 29th, 2012 at 12:26:03 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Having a customer's deposits means the bank becomes involved in all the payments activity of that customer and collects all kinds of service provider fees from it.

Also it brings the customer in the door so they can be sold loans.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Feb 29th, 2012 at 12:28:19 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Yes.¹

But more importantly, depositors don't ask for collateral. The discount window does. So when your balance sheet is full of shit, you are willing to pay your depositors for the privilege of not being asked questions.

If your balance sheet is not full of shit, however, there is no particular reason to prefer creditors who do not ask questions over ones who do.

- Jake

¹A lot of bankers (and, unfortunately, regulators) are witch doctors who target cutesy rules of thumb like "lending/deposit ratio," Taylor rules or "even banks around the rediscount rate." Most of these rules of thumb are bullshit, but pass for plausible under ordinary conditions, because they basically amount to "do the same thing you did yesterday."

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 12:00:16 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

If you can find a bank that'll pay 4 % on a demand deposit anywhere in the world today, I wanna know where it is, so I can run as fast as possible in some other direction.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 11:30:25 AM EST
[ Parent ]

Why do we need private banks at all? | 133 comments (133 topical, 0 editorial, 0 hidden)

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