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)

so when you wrote

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.

how does this square with 1.5%

1.5 % is a negative real rate under currently prevailing consumer price inflation.

Reading the posts you quote tends to be good for your argument.

The policy rate is [inflation] - [("cyclical") unemployment] for central banks operating under a Taylor/Mankiw Rule (which includes the Fed and the ECBuBa). Which averages to the inflation target. So most of the time the policy rate will be in excess of 1.5 % nominal.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 11:38:53 AM EST
[ Parent ]

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

So their business model is to borrow from depositors and pay them 1% and then deposit that with the reserve bank at below inflation (at 1.5% although they really only get 0.25%). So they net 0.5% which means they might as well set the money on fire.

Ok.

by rootless2 on Wed Feb 29th, 2012 at 12:21:07 PM EST
[ Parent ]

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

Which part of deposit-taking is not a profic center for banks don't you get?

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 12:24:48 PM EST
[ Parent ]

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

I understand that to be your assertion.

by rootless2 on Wed Feb 29th, 2012 at 12:44:44 PM EST
[ Parent ]

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

So their business model is to borrow from depositors and pay them 1% and then deposit that with the reserve bank at below inflation (at 1.5% although they really only get 0.25%). So they net 0.5% which means they might as well set the money on fire.

Wait, what?

In what fictional alternative universe does it not make sense for a bank to get paid 50 BP of its customers' money per year?

You lend me a million. I put the million with the CB. The CB pays me € 500 more than I pay you. Who cares if it's below inflation? The inflation eats the customers' money, not the spread (OK, technically it does eat the spread, but it eats less than half a basis point in this case).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 12:36:19 PM 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". "

by rootless2 on Wed Feb 29th, 2012 at 12:56:42 PM EST
[ Parent ]

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

Well, yes.

When you're in at the zero bound, it means the central bank stops paying you to handle deposits.

This does not in any way, shape or form make deposits more necessary for lending. At all. Really, riddle me this: How the fuck does being able to borrow at nearly 0 % from the CB against toilet paper collateral make deposits in any way relevant to the lending operations of the banks?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 29th, 2012 at 01:52:24 PM EST
[ Parent ]

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

Can you clarify for me whether in your understanding in the normal course of events, deposits are sources of profit for banks or just a tiresome service provided to lure borrowers into the shop?

by rootless2 on Wed Feb 29th, 2012 at 04:36:11 PM EST
[ Parent ]

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

In the ordinary course of events, taking deposits makes the bank money, because the government - by way of the central bank - subsidises the handling of deposits through maintaining a non-zero interbank rate.

Were the government to run a zero interest rate policy -which it could and, in my opinion, should- taking deposits would become a loss-leader for other activities (or simply go away) unless deposit handling were explicitly rather than implicitly subsidised.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 1st, 2012 at 02:41:16 AM EST
[ Parent ]

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

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