When lloyds creates another loan it automatically creates the matching deposit. You get both a mortgage debt and a credit asset when you take out a loan. You then transfer that credit asset to somebody else to pay them. But it is the loan that creates the credit asset in the first place. Deposits have no quantity control function on lending. It's only ever a pricing issue.

When you lend to someone, he is free to transfer the money immediatly to whomever, who may or may not be a customer of that bank. The loan must have been funded for the bank to be able to afford to transfer the deposit away. Now you may get some deposit back that same day but the funding decision has to be made before.

Anyway, neither funding or pricing determines the amount of lending these days, capital ratios are the limiting constraint.

Ah, but when they transfer that money, it'll be to some customer of some bank whose loan customers will also be transferring money in the other direction. This means, in practice, that the main constraint on a bank's ability to lend money is how willing all the other banks are to lend money at the time. The Bank of England paper linked earlier in the thread explains why this has undesirable economic implications that are missed by the incorrect money multiplier model.

The bank needs liquidity to settle inter-bank transfers after they've lent, some of that is deposits but they can also just borrow reserves from other banks if they need to do that.

The lending itself created new bank credit, it was never "funded". If the bank has capital adequacy, they make the loan.

When the deposit is transferred away essentially the target bank becomes the depositor in the source bank.

That's effectively what 'interbank lending' is. The central bank system then centralises that peer-to-peer processes.

Deposits are swapped for capital in the same way.

> You then transfer that credit asset to somebody else to pay them.

So the matching deposit disappears from the liabilities side of Lloyd’s balance sheet while the loan remains in the assets side? That leaves the balance sheet unbalanced, doesn’t it?

The deposit may disappear from lloyds' liabilities, but it needs to transfer an equivalent amount from its reserve account to (say) Santander's reserve account. So Lloyd's loses both liabilities and assets when someone moves deposits to another bank.

Of course, my point is that neilwilson’s statement (emphasis mine): “When lloyds creates another loan it automatically creates the matching deposit. (..) Deposits have no quantity control function on lending.” is at best misleading.

A bank with an empty balance sheet cannot give a loan.

Lending money is transforming one asset (reserves) into another (loan). The fact that the loan is created as a new deposit in the name of the borrower, keeping the reserves constant, muddles the issue a bit but the simplest description of the process is something like:

1) D makes a $1mn cash deposit at the bank. The bank has liabilities: $1mn owed to D and assets: $1mn in cash.

2) The bank lends $1mn in cash to B. The bank has liabilities: $1mn owed to D and assets: $1mn lent to B.

We can add an intermediate step where the loan is still a deposit at the bank (liabilities: $1mn owed to D. + $1mn owed to B., assets: $1mn in cash + $1mn lent to B.) but it is just a distraction. Not many people borrows money to keep it in a deposit at the same bank.

That's not the case.

A bank with an empty balance sheet can give a loan. It is simply Dr Loans, Cr Deposits. That's it.

Nobody ever makes cash deposits into a bank. The cash is just burned when the bank receives it (if it is worn enough).

A cash deposit to a bank is just a deposit transfer from the central bank. Cash is just a receipt for entries already at the central bank. You are starting half way down the process.

To take your example 1) The balance sheet is $1mn Fed deposit asset, $1mn Credit to D. 2) The Balance sheet is $1mn Fed deposit asset + $1mn Loan Asset to B, $1mn Credit to B, $1mn Credit to D. 3) If the cash is withdrawn then the Fed deposit asset and the Credit to B is marked down. The cash will be new cash issued as a receipt for the deposit at the Fed.

You can do exactly the same without the deposit of D first. At that point the Fed asset would be negative and become the lender with the loan posted as collateral.

> A bank with an empty balance sheet can give a loan. It is simply Dr Loans, Cr Deposits. That's it.

A banks needs capital, an empty balance sheet doesn’t cut it.

> Nobody ever makes cash deposits into a bank.

Yes, they do. If you pay $5 for a capuccino or whatever what do you think they are going to do with your $5 bill at the end of the day?

> The cash is just burned when the bank receives it (if it is worn enough).

So they never receive cash because nobody ever deposits cash. And at the same time they do receive cash and they just burn it. You have convinced me, there is something seriously wrong with the banking system.

Only 1) the Basel framework of bank regulation which has been internationally adopted, and 2) explanations from the Bank of England (linked above) which categorically states that this is actually how banks work. The Deutsche Bundesbank has also published something to this effect, and the Governer if the Reserve Bank of Australia talked about it in a speech the other day [1].

1. https://www.rba.gov.au/speeches/2018/sp-ag-2018-09-19.html

I don’t want to get into some ad hominem attacks but I don’t think Basel 3 says that. Anyway, this is simple arithmetic, Lloyds could not have such a large loan book if it wasn’t funded by deposits. There are simply just not enough wholesale funding and capital liabilities. And the liquidity requirements are only a fraction of the deposits, particularly for retail deposits which are assumed to be sticky.

My understanding is that deposits are really just a manifestation of a promise that a trusted party holds, so that the party making the deposit can make more promises to other parties. So, in banking a promise is often just as valid as holding a deposit. They aren't really lending you value, they are lending you verification of value.

They are unsecured liabilities. But like all liabilities the bank received an asset when it issued it (cash or else), and like all liabilities the bank must have sufficient assets to pay it back on demand. The bank may not have the necessary liquidity to pay back all deposits at once (some of these assets are 30y mortgages) but it has an asset (otherwise is not solvant).

It absolutely does say that. The whole of part 1, "Minimum capital requirements and buffers" is 100% based on capital, and deposits don't factor in to any of the definitions of Tier 1 capital. The leverage ratios also factor entirely from capital that doesn't include deposits.

100% is the conversion of a loan balance to leverage exposure. The capital requirements vary between banks and regulator, but they are typicaly 3-5% of the leverage exposure. A leverage ratio requirement of 100% would make lending uneconomical. To achieve a return on equity of 10%+, you would have to charge over 10% on your loans.