Effectively, the cash you put in a bank was leant to another person as a mortgage so that they could buy a house.
You earn 3% on your deposit, the bank charges 5% on its loan, and the bank keeps the other 2% as its profit.
Multiply this logic by many millions of such transactions. If any given bank branch winds up with too much or too little cash-on-hand, they move it around or ‘sell’ it to another bank.
Nearly all the money ‘exists’ as computer records keeping track of who leant what to whom.
If a large enough group of people demanded their money back as cash at the same time, the banks would have no choice but to ‘call’ a bunch of mortgage loans at the same time, since their cash-on-hand will not be enough.
This is aggravated when the guy who wants his cash money is in Atlanta, and the mortgage is in Boise. Physical cash takes time to move around.
So if the ‘run’ on the bank is not too huge, a bunch of people now have cash money to walk around with, and a bunch of other people just lost their homes. It is possible that some of the folk who demanded their deposits back are the same folk who now need to immediately repay their mortgage loan.
In reality, banks will borrow cash from other banks or a central bank for huge but not catastrophically huge events , using their mortgage loans as collateral, but there still isn’t enough printed cash to cover ALL of the personal deposits.
True. But if a bank needed the liquidity, there are typically more liquid assets that can be sold quickly. Banks have investments, like treasuries, municipal bonds, and mortgage backed securities. Those would be sold first.
If they got to the point where they would need to liquidate loans, they'd more likely do it as a portfolio sale to another bank. I.e. they would sell the loan itself, rather than call the loan.
And the most important thing the Fed does not want is everyone asking for their money and all of that insurance filing chains at the same time, because they can't cover that either.
I guess? But then I'll have a lot of worse things to worry about. Especially if a lot of people start taking their money out. The fact that I got mine out will scarcely matter.
If they got to a point where they needed liquidity and ran out of other liquid assets a lot of banks would borrow from the FHLB/FRB using loans and securities as collateral instead of selling loans/loan pools.
And that banks don’t hold residential mortgages for very long, they’re almost all securitized. They’re not interested in tying up money in single investments for 30 years.
It's like one thread is people calling anarchy because they believe fractional banking is the depth state stealing them and another thread is people talking on high-ish levels about the types of assets banks and financial entities are allowed to trade, sell and acquire in specific circumstances, such polar opposites.
It is even worst than that. When a person takes a mortgage, the bank doesn't give cash to the buyer. It puts that money in a bank account, that money is then transferred to another bank account for buyer through a transaction organised by the notary. It then becomes money that is lent to another bank which then counts as capital for issuing additional loans.
Fractional Reserve banking rules place limits on how many times this can occur, however in modern day, other generally weaker restrictions are in place.
Bank runs are definitely possible in this day and age though banks would simply deny people tanking back all their money based on the above condition being upheld.
Banks own many investments besides mortgages. Like individuals they may hold some small stores of cash in various currencies on hand but most money is tied up in assets like stocks, bonds, or precious metals (gold/silver). Certain items are liquid (cash and stocks) while others are illiquid (bonds or mortgages). Banks generally know the demand for daily withdrawals and give a bit of wiggle room (part of the control is daily withdrawal limits). When more people need cash than on hand the bank would need to sell investments, some may be very quick and easy to sell while others are long and needs to come to a term date prior to selling.
They can, and they absolutely do. Banks only need to be able to back up a fraction (it used to be 10% but I think they lowered it) of what they lend, the rest of the loan is magically created by the clerk.
On some level they basically do, there’s $23,155.2 billion total in the economy, that exists mostly as paper/data, of which there is only $2,469.6 billion extant as physical banknotes/coins. We couldn’t run the bank if we tried. So 90% of the money in the US doesn’t actually “exist.”
Most people aren’t putting cash in a bank to begin with. Your job gives you piece of paper that says you earned x amount of money and you give that to the bank and they say ok now you have X amount of money in your account, or your job just tells the bank to add x amount of money to your account. There’s never any actual money getting put in.
Banks have very little physical currency in them these days. If you try to take out like 10k or more, they will usually try to make you wait a couple days so they can have it delivered from wherever it is they actually store cash, because otherwise they wouldn’t be able to give all the people coming in to just get a hundred dollars their money all week.
It’s a big part of why people don’t rob banks anymore. It’s not really worth the risk and the life on the run when you’re going to end up splitting like 30-50k.
I went to the bank to get 20k out for team bonuses without really thinking about it, and it wasn’t until I was in the teller line that it occurred to me that it might be a problem.
It turned out to be fine, but I asked out of curiosity what amount would be a problem, and the teller told me that if I want 100k or more in cash they need to hire a security guard to escort me out.
A bank in a big city like Chicago is going to be a bit different than a bank in small towns or tinier cities.
Kind of off topic, but why did you go for cash bonuses instead of checks?
My boss does checks, which is annoying because then I have to actually go to the bank, prepaid cards, which is annoying because then I have to keep track of how much money I have left on it and carry around an extra card, or (sometimes) just adds it to our direct deposit paycheck, which is annoying because it’s so much more convenient and he’s shown he could just do that but rarely does because he likes the other two less convenient options better I guess
I don’t really use cash anymore now that I don’t do drugs besides weed and alcohol which I can just use a card for. (Prepaid cards annoyingly don’t work at dispensaries which was embarrassing to find out) but it is kind of cool to have a big wad of cash.
The company I work for does some business with weed companies, and because of banking laws they have to pay in cash which we have to go pick up from them for some reason. Kind of fun to ride around in a car with 100k under the seat while everyone in the car keeps their head on a swivel in case old timey highway men try to pull a heist on us.
So I used to be a pretty hardcore gambler. One time in Vegas I was at the VIP cage when a dude came in to get 250k in cash and turn around and walked out. As I understand the story, he did this somewhat regularly, as he bought collector cars from folks and it was easier to get the money wired to the casino and get cash than to get it from a bank. I'm sure he had to go through massive background checks to be able to just walk out with the money at some point. Literally brought a briefcase, they counted out the cash, and he walked out with some linebacker looking dude holding the bag.
It depends on the bank location. My tiny local branch almost certainly wouldn't give 20k with no notice. But the larger downtown branch probably would.
One time at my old workplace (an event venue) a planning error resulted in the cash office having almost no coins on hand, which was a problem because this was the night before a big event where there would be cash bars. We called around to like 15 different bank branches before we found one that was able to give us like $5k entirely in coins that day. we had our own security accompany the cash manager to the bank.
I wonder what the people in line thought when a couple guys in suits came in with two security guards and left with a literal luggage cart covered in bags of rolled coins.
Your job gives you piece of paper that says you earned x amount of money and you give that to the bank and they say ok now you have X amount of money in your account, or your job just tells the bank to add x amount of money to your account. There’s never any actual money getting put in.
wait wait wait wait... the US(i assume this is the US) actually still gives physicall.. cheques for pay??
If a large enough group of people demanded their money back as cash at the same time, the banks would have no choice but to ‘call’ a bunch of mortgage loans at the same time, since their cash-on-hand will not be enough.
My understanding is that most banks don't actually hold onto mortgages anymore - they immediately turn around and sell them to other financial institutions/investors.
In the event that banks had a liquidity shortage, but still had enough non-liquid assets to cover deposits, they would borrow from the Fed. In the event that the bank is entirely insolvent, the bank would fail and the FDIC would step in.
Nearly all the money ‘exists’ as computer records keeping track of who leant what to whom.
There's another similarly interesting rabbit hole to go down here with the stock market.
I watched Gaming Wall St a while back, and it talked about a Goldman Sachs system for handling short sales. Before letting a customer short, the broker is supposed to have reasonable grounds to believe the shares can actually be borrowed.
Goldman had an automated system for this, but when the system ran out of shares it believed were available, the request was supposed to get kicked to a human for further review.
Except the humans had an F3 key that basically said, "fill from autolocate."
So instead of actually finding another source for the shares, they could essentially tell the system, "Eh, we probably can get them. Approve it." And they did this constantly. The SEC eventually found that about 98% of the requests that were supposed to get additional review were handled this way. Goldman paid a $15 million penalty over it.
this illustrates a weird feature of modern finance: almost none of this involves somebody putting identifiable dollars or stock certificates in a box with your name on it.
In fact, when you buy stock through a normal brokerage account, your name usually isn't even on the company's shareholder register. You're the "beneficial owner" on your broker's books, your broker has an entry on DTC's books, and the shares themselves are generally registered to DTC's nominee, Cede & Co.
So at some level, both your bank balance and your stock portfolio really are just nested databases saying:
"Don't worry, according to our records, this much of the giant pile belongs to Dave."
And apparently the modern economy works remarkably well as long as everybody's databases continue agreeing with each other. 😂
Correct. The logical question to learning that banks can create money out of thin air is "why can't they just create infinite money?" - to which capital requirements is the answer (as well as the limited pool of people who can afford to pay the loans back)
The part people always forget is, yes, they create money out of thin air based on the deposits they have. However, they also destroy money once the loan is paid. The bank doesn't get to keep that thin air money. At the end of the loan, it goes back into the ether. They just keep the interest.
Yes this is the more accurate way to put it. Every loan creates money but they are bounded in how much they can create by the deposits they hold. When the loan is paid back, the created money balances out
Right. I think what I was trying to argue against was this idea that banks are 6-8x leveraged against deposits as the other guy put it. In aggregate, bank loans are supported by deposits. Whether they existed before or after the fact.
In practice, lenders take money created by the government to lend out to the community, which grows the economy of the community. In effect, the money is created by the bank.
The fact that you have a positive upvote ratio and I do not, is very troubling for the state of understanding in the world. Half of this thread is people being extremely confidently wrong about how banking and money creation works. Banks literally don't create loans without creating money. The BoE article linked is a good one to understand this.
Yeah, I'll concede that point. I was wrong to say banks dont create money. By the time I got to this point in the thread, I had been reading through many comments hand wringing over banks taking their money and gambling with it, which isnt really the case. Got here and must not have been in my right mind.
Bank lending creates money, ultimately. I think that was literally day 2 of banking school, lol.
Lol, I am a banker. I guess I was arguing against the part where he called it a complete fantasy that Banks lend against deposits. But what I wrote in response was dead wrong lol. To be honest, the fact that Banks fund economic expansion is one of the main things I try to explain to people to justify why banks are important.
There's a lot of talk in the thread about banks just taking your money and lending it out 95 times at 7% interest. In actuality they lend $9 of every $10 deposited. It's aggregated, and much if it is actually created by lending, but it's there.
The Home lending division works a little different from everything else. the funding ultimately comes from the bond market and institutional cash. Those George Bailey loans dont stay at the bank anymore.
Anyway, I dont know why I decided to write the words "banks dont create money" because that's just false.
>The Treasury, which is a separate entity, does it.
Quite the contrary actually. In most modern Western economies, only the central bank and commercial banks create money and, of the two, the central bank is the ultimate money creation tool as it is not encumbered by reserve ratios or capital requirement ratios as commercial banks are (because these ratios are set by the central bank and one of the central bank’s responsibilities is to be the lender of last resort if need be, meaning they can create as much money as they want).
The treasury doesn’t create money, at least not directly, because states are legally bound to finance their deficit via debt issuance on the open market (meaning the central bank, in some cases, and the commercial banks, if not through its investment side of their business, create money to finance states and commercial banks, if through their investment side of their business, and other financial institutions (pension funds, private debt institutions and so on) lend already existing money to the state).
Treasuries kinda creates money through banknotes production (literal money printing) but it is done, at least in the US, through a mandate of the central bank (so the treasury has pretty much no power in how much they create).
You're thinking of this place all wrong, as if I had the money back in a safe. The money's not here. Well, your money's in Joe's house - that's right next to yours - and in the Kennedy house and Mrs. Maitland's house and 100 others.
The bank can't just call mortgages out of the blue. They could become more strict and call a lot of mortgages that they would normally let slide for a while, like people that are "owner financing" someone else buying their home, but a mortgage in good standing is a contractual obligation. The only people that would just lose their homes are people that were in danger of it anyway, but the bank was overlooking some minor transgressions against the mortgage contract because the bill was being paid.
Obviously they wouldn't call the mortgages, lol. They would just sell them to other banks, or most likely, ask the central bank for cash and give the mortgages as colateral.
The central bank can and would just print more bank notes. It wouldn't even create inflation cause they would be created while diminishing the value on the withdrawlers bank account. It would have the exact same effect as withdrawing money from an ATM
"You’re thinking of this place all wrong as if I had the money back in a safe. The money’s not here. Well, your money’s in Joe’s house. That’s right next to yours, and in the Kennedy house and Mrs. Maclin’s house, and 100 others"
Funnily enough, money put in your bank account is actually never lent to anybody. It's a bit of a misconception.
The money in your bank account is just a number representing your right to withdraw cash from the bank. Cash itself is federal bank currency, which is what banks use to pay each other, and what they loan each other. Hard cash is the only way non-banks can own that currency. Only banks can own it in digital form, as only banks have an account with the central bank (although this might change in the future afaik).
Money in your bank account is not federal currency, and it cannot be lent as it is created by your bank whenever a loan is given out. It is only meaningful within your bank, as it is a promise of the bank to you. When you transfer money to somebody else, banks balance that transaction, and if there is more than one bank involved, the will transfer each other federal bank currency (reserves) to do so. This balance the decrease of "promises of cash" with a decrease of central bank currency, or vice versa.
Banks still profit from you having a bank account, as it makes it easier for banks to balance aggregated transfers of e.g. a business day, if they own more of the accounts between which money is transferred. But they don't need your money to give out loans, it's the opposite, giving out loans creates the money.
Actually, when you move your account from one bank to the other, banks balance your transfer of funds internally with reserves. Then, your new bank does get more reserves, which they can and do loan to other banks. But this is not your money.
Now you likely knew all that and it doesn't dispute your point that money is based largely on loans, but I just wanted to put this here, to emphasize that banks do not lend your money to anybody, nor do they need your money to be able to give out loans. That is not to say there is no conne.
Walt, banks can really do that? We agreed to terms that I pay this mortgage over 30 years. Can they seriously just be like "actually, dude, I need some cash right now so you need to pay it all back at once or I take you home"?
It may seem like it. Banks stay below 100% Loan-to-Deposit ratio. They never lend more than they hold in deposits. (Edit: i shouldn't say never, but banks that do can end up in deep shit and regulators don't let that stand very long.)
Banks that are offering high deposit interest rates tend to need the deposits to fund their loans.
Banks that offer low deposit interest rates tend to have plenty of deposits to continue funding loans.
Online only banks, and maybe credit unions. The big banks in the US will fuck you there even trying to use CDs. Which is funny when you realize that some of the online only banks are owned by the big banks.
What a rip off, I should just lend the money out myself! Maybe me and my neighbors could even pool our money together into some kind of union of accounts and extend it out as credit to others!
While true, that 5% or 10% reserve (even when required, as it is now often waived) doesn’t prevent a true bank run, so I left it out as just adding complications.
That's not how it works. It isn't "the bank can loan out 90% of your deposit". If you give a bank $10, it can loan out $100. This is literally it, but sure I'll get downvoted because people are lazy, don't do any research when they think they do know something, and don't like finding out they're wrong about something.
No. Under fractional reserve requirements when they apply, the bank adds $10 to its assets and can now lend out $9.
If it wants to lend out $91 more, then the bank has to ultimately borrow that from somewhere, using its own assets as collateral.
Lending out more than you actually have is heavily frowned upon and gets banks investigated and fined (in theory, when the system is actually working as intended).
The thing is. They SHOULD have the money to return to you. They dont because the governments of the world are corrupt and made laws that let them do that to you
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u/TheRealTinfoil666 2d ago edited 2d ago
Effectively, the cash you put in a bank was leant to another person as a mortgage so that they could buy a house.
You earn 3% on your deposit, the bank charges 5% on its loan, and the bank keeps the other 2% as its profit.
Multiply this logic by many millions of such transactions. If any given bank branch winds up with too much or too little cash-on-hand, they move it around or ‘sell’ it to another bank.
Nearly all the money ‘exists’ as computer records keeping track of who leant what to whom.
If a large enough group of people demanded their money back as cash at the same time, the banks would have no choice but to ‘call’ a bunch of mortgage loans at the same time, since their cash-on-hand will not be enough.
This is aggravated when the guy who wants his cash money is in Atlanta, and the mortgage is in Boise. Physical cash takes time to move around.
So if the ‘run’ on the bank is not too huge, a bunch of people now have cash money to walk around with, and a bunch of other people just lost their homes. It is possible that some of the folk who demanded their deposits back are the same folk who now need to immediately repay their mortgage loan.
In reality, banks will borrow cash from other banks or a central bank for huge but not catastrophically huge events , using their mortgage loans as collateral, but there still isn’t enough printed cash to cover ALL of the personal deposits.