Re:Follow the money: Apple vs. the FBI
by pas on Sunday April 03, 2016 @07:49AM
(#11415800)
Basel III is the new risk limit framework.
Banks have become critical infrastructure.
They are not subsidized nor funded by the Federal Reserve System (the Fed) in any way. The (fractional) reserve requirement is not really relevant, because any bank can just borrow cash (discount window policy), put it into their reserve account - and presto, - lend out more. So if they want to lend out X, they have to borrow X+(0.05 * X).
But the reserve requirement and the discount window are not the main monetary policy tools, because it's usually not cost effective to borrow from the Fed.
However, it's even easier than that. Not all liabilities are (fractionally) backed by reserves, so if a bank can shuffle the money from one type to an other, it can lend out more of that. ( https://www.newyorkfed.org/medialibrary/media/research/epr/0... )
All in all, banks are risk constrained. The growth rate of the money supply is basically a measure of how lenders think the economy will grow (how much new wealth will be created), since debt that gets paid back shrinks the money supply (assuming constant velocity of money, if the velocity increases, less money is sufficient to sustain the debt cycle).
Personal savings accounts are important, because they get access to cheap capital, so they don't have to raise it elsewhere in order to lend it out.
Effectively, banks are a strange, misaligned, mismanaged and misregulated amalgamation of a completely automatic thing [money management, transactions, deposits, ATMs] and (investment) risk assessment.
Those should be separated, or the interfaces made clear. (Such as you get a better credit rating if you grant access to your account event history/stream. And we should forget about using savings deposits and other accounts as sources for lending.)
Banks have become critical infrastructure.
They are not subsidized nor funded by the Federal Reserve System (the Fed) in any way. The (fractional) reserve requirement is not really relevant, because any bank can just borrow cash (discount window policy), put it into their reserve account - and presto, - lend out more. So if they want to lend out X, they have to borrow X+(0.05 * X).
But the reserve requirement and the discount window are not the main monetary policy tools, because it's usually not cost effective to borrow from the Fed.
However, it's even easier than that. Not all liabilities are (fractionally) backed by reserves, so if a bank can shuffle the money from one type to an other, it can lend out more of that. ( https://www.newyorkfed.org/medialibrary/media/research/epr/0... )
https://www.richmondfed.org/~/media/richmondfedorg/publicati... - graph on the 3rd page is worth looking at
All in all, banks are risk constrained. The growth rate of the money supply is basically a measure of how lenders think the economy will grow (how much new wealth will be created), since debt that gets paid back shrinks the money supply (assuming constant velocity of money, if the velocity increases, less money is sufficient to sustain the debt cycle).
Personal savings accounts are important, because they get access to cheap capital, so they don't have to raise it elsewhere in order to lend it out.
Effectively, banks are a strange, misaligned, mismanaged and misregulated amalgamation of a completely automatic thing [money management, transactions, deposits, ATMs] and (investment) risk assessment.
Those should be separated, or the interfaces made clear. (Such as you get a better credit rating if you grant access to your account event history/stream. And we should forget about using savings deposits and other accounts as sources for lending.)