User:Andrewedwardjudd
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reserve requirements
https://www.ecb.europa.eu/pub/pdf/other/gendoc2002en.pdf
The single monetary policy in the euro area: General documentation on Eurosystem monetary policy instruments and procedures
The daily reserve holding of an institution is calculated as the end-of-day
In the United Kingdom, money is endogenous - Mervyn King in 1994
But what did he mean by that?
From about 1991 a remarkable consensus had emerged within developed economies about the optimum design of monetary policy methods. Simplifying somewhat, we could say that the early 1980s saw the final demise of attempts to control the quantities of money (and/or credit) by any direct method[1]
This did not happen all at once.
In 1994 Mervyn King then Chief Economist at the Bank of England said[2] 'One of the most contentious issues in assessing the role of money is the direction of causation between money and demand. Textbooks assume that money is exogenous. It is sometimes dropped by helicopters, as in Friedman’s analysis of a ‘pure’ monetary expansion, or its supply is altered by open-market operations. In the United Kingdom, money is endogenous - the Bank [of England] supplies base money on demand at its prevailing interest rate, and broad money is created by the banking system'.
One of the reasons money is endogenous is because banks create credit[3][4] rather than lending existing money. Therefore if the central bank in turn has a policy of supplying money on demand at a price, then the broad money supply can keep rising. However, the creation of central bank money actually happened after money creation by the commercial banks (King 1994 Page 264). King continues, 'Therefore the endogeneity of money has caused great confusion, and led some critics to argue that money is unimportant. This is a serious mistake' (King 1994, Page 264).
Charles Goodhart, an economist and formerly an advisor at the Bank of England and a former monetary policy committee member, worked for many years to encourage a different approach to money supply analysis and said the base money multiplier model was 'such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction'[5] Ten years later he said[6] ‘Almost all those who have worked in a [central bank] believe that this view is totally mistaken; in particular, it ignores the implications of several of the crucial institutional features of a modern commercial banking system....’
13 years after Mervyn Kings observations on 'contentious issues' between Exogenous and Endogenous money, Deputy governor Paul Tucker was able to say[7] ”When, ten years ago, Mervyn King delivered a lecture...., he reviewed ideas on the monetary transmission mechanism....... and the role of money (and credit). These days most such accounts.....begin with a simple assertion that the central bank sets the short-term nominal interest rate. And they go on to explain how, given sticky wages and prices, that enables the central bank to shift the short-term real interest rate in a way that either restrains or stimulates aggregate demand. Notice no mention of money here. On this view of the world and, in particular, given this way of implementing monetary policy, money – both narrow and broad – is largely endogenous. The central bank simply supplies whatever amount of base money is demanded by the economy at the prevailing level of interest rates.'
Therefore many Central bankers and monetary economists now believe money creation in banking systems is endogenously created and deposit multiplication by the text book money multiplier is an unsatisfactory teaching tool[8] and explanation of the what really happens.
Note however, it is clear that loans create money and a money multiplier exists related to lending. The issue being addressed however is that money creation is chaotic and cannot be modeled using simple mechanical views of lending only created from existing deposits because banks essentially do not loan out deposits, but rather create credit and then manage the liabilities this creates for them. (Tucker 2007).
However notwithstanding all of the above, dispite the apparent consensus at the BOE and other central banks, twenty five years after the switch to short-term interest rates, macroeconomic instruction at the textbook level still requires students to learn that monetary policy consists (solely) of exogenously imposed changes in the money stock which transmits itself to changes in demand (and then possibly output but more usually the price level) by some version of ‘real balance effects’. This is wholly at odds with our everyday knowledge of the policy instrument and with what central banks widely believe is the transmission of monetary policy effects (Howells P et al 2006 page 3).
stuff being worked on
Charles Goodhart said in 2007, "[When the] Central Bank sets interest rates, as is the generality, the money stock is a dependent, endogenous variable. This is exactly what the heterodox, Post- Keynesians, from Kaldor, through Vicky Chick, and on through Basil Moore and Randy Wray, have been correctly claiming for decades, and I have been in their party on this." [9]
Bank lending
The economic literature on the ‘bank lending’ channel of the Monetary Transmission Mechanism explores the conditions under which a tightening of monetary policy causes the terms on bank lending to tighten over and above the increase in risk-free short-term real rates. The literature has typically assumed
- (i) that a monetary policy tightening is effected by the central bank withdrawing reserves from the system (or slowing the pace of reserves injection);
- (ii) that banks are required to hold a proportion of transactions deposits in reserves, so that reduced reserves provision entails slower deposit growth; and
- (iii) that they do not have unrestricted access to liabilities that are not subject to reserves requirements, and so cannot fill the gap left by slower deposit growth and must, instead, slow loan growth, which they do by tightening credit conditions.
The first two steps seem archaic. The BOE effect monetary policy changes by controlling the price not the quantity of central bank money in the system; and, in the UK, banks choose their own reserves targets rather than having them determined by a balance sheet ratio of some kind. (Tucker[10], Paul. 2007.12.03 pages 6-7)
Where does this leave base Money, the starting point for much traditional monetary analysis? The BOE explain that banks, in the short run, lever up their balance sheets and expand credit at will - there liabilities are money and because transactions balances and so the means of exchange in our payments system, the moneyness of bank deposits lies at the core of credit intermediation. Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank ‘writing a cheque on itself’. That is, banks extend credit by creating money. This ‘money creation’ process is constrained: by their need to manage the liquidity risk – from the withdrawal of deposits and the drawdown of backup lines – to which it exposes them. 15 Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence. (Tucker, Paul. 2007.12.03 pages 9-10). [11]
reserve requirements
https://www.ecb.europa.eu/pub/pdf/other/gendoc2002en.pdf
The single monetary policy in the euro area: General documentation on Eurosystem monetary policy instruments and procedures
The daily reserve holding of an institution is calculated as the end-of-day
loan drives deposits
References
- "Monetary Policy Regimes: a fragile consensus, Peter Howells and Iris Biefang-Frisancho Mariscal (2006)" (PDF). University of the West of England, Bristol.
- "King Mervyn, The transmission mechanism of monetary policy" (PDF). Bank of England.
- "Paul Tucker, Money and credit: Banking and the Macroeconomy" (PDF). Bank of England.
Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer's current account, which can be paid away to wherever the borrower wants by the bank 'writing a cheque on itself'. That is, banks extend credit by creating money. This 'money creation' process is constrained by their need to manage the liquidity risk from the withdrawal of deposits and the drawdown of backup lines to which it exposes them. Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence ...'
- "Modern Money Mechanics. Page 37. Money Creation and Reserve Management" (PDF). Federal Reserve Bank of Chicago.
In the real world, a bank's lending is not normally constrained by the amount of excess reserves it has at any given moment. Rather, loans are made, or not made, depending on the bank's credit policies and its expectations about its ability to obtain the funds necessary to pay its customers' checks and maintain required reserves in a timely fashion ...'
- "Goodhart C A E (1984( Monetary Policy in Theory and Practice p.188. I have not seen, cited in Monetary Policy Regimes: a fragile consensus. Peter Howells and Iris Biefang-Frisancho Mariscal" (PDF). University of the West of England, Bristol.
The base-multiplier model of money supply determination (which lies behind the exogenously determined money stock of the LM curve) was condemned years ago as 'such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction ...'(Goodhart 1984. Page 188)
- "Goodhart C. (1994), What Should Central Banks Do? What Should Be Their Macroeconomic objectives and Operations?, The Economic Journal, 104, 1424–1436 I have not seen, cited in "Show me the money" – or how the institutional aspects of monetary policy implementation render money supply endogenous. Juliusz Jabłecki" (PDF). Bank and Credit, the scientific journal of the national bank of Poland.
- "Glen Stevens, the Australian Economy: Then and now". Reserve Bank of Australia.
money multiplier, as an introduction to the theory of fractional reserve banking. I suppose students have to learn that, and it is easy to teach, but most practitioners find it to be a pretty unsatisfactory description of how the monetary and credit system actually works. In large part, this is because it ignores the role of financial prices in the process ...'
- "Charles Goodhart, 2007.02.28, Whatever became of the monetary aggregates?" (PDF). Bank of England.
- "Paul Tucker, 2007.12.13, Money and credit: Banking and the Macroeconomy" (PDF). Bank of England.
- Elements of Banking Made Simple, Hoyle and Whitehead (Oxford: Heinemann, 1989 edition). From preface "specifically designed to meet the requirements of the Institute of Bankers’ Banking Certificate and Foundation Course". Page 22 "Consider a deposit....£1000 in banknotes....(a) We can lend out £700.... This is the simple view of bank lending. (b) It is....possible for us to have deposits of £3333.33. As we only have deposits....of £1000 we can lend out £2333.33, provided we can find borrowers. This is the more sophisticated view of bank lending.
- "Disyatat, P. 2010 The bank lending channel revisited. Page 2" (PDF). Bank for International Settlements.
the process actually works in reverse, with loans driving deposits. In particular, it is argued that the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending.
{{cite web}}: line feed character in|quote=at position 83 (help) - "Freedman, C. Reflections on Three Decades at the Bank of Canada" (PDF). Bank of Canada.
It used to be that most academic research treated money (or sometimes base) as the exogenous policy instrument under the control of the central bank. This was an irritant to those of us working in central banks, because the instrument of policy had always been the short-term interest rate, and because all monetary aggregates (beyond base) have always been and remain endogenous. In recent years, more and more academics, in specifying their models, have treated the short-term interest rate as the policy instrument, thereby increasing the usefulness of their analyses...
{{cite web}}: line feed character in|quote=at position 369 (help) - "Montador, B. The implementation of monetary policy in Canada" (PDF). Bank of Canada.
Required reserves have traditionally been justified by a desire to influence the size of the money multiplier and by prudential concerns. However, central banks' views about money supply determination have for a long time been that the money stock is demand determined
{{cite web}}: line feed character in|quote=at position 89 (help) - "Razzak, W. Money in the Era of Inflation Targeting" (PDF). Reserve Bank of New Zealand.
In New Zealand....money supply is endogenous
- "White, W. Changing views on how best to conduct monetary policy: the last fifty years". Bank for International Settlements.
Some decades ago, the academic literature....emphasised the importance of the reserves supplied by the central bank....., and the implications (via the money multiplier) for the growth of money and credit. Today, it is more broadly understood that no industrial country conducts policy in this way under normal circumstances.
- "White, W. Changing views on how best to conduct monetary policy: the last fifty years". Bank for International Settlements.
there has been a decisive shift towards the use of short-term interest rates as the policy instrument [in industrialised countries]. In this framework, cash reserves supplied to the banking system are whatever they have to be to ensure that the desired policy rate is in fact achieved.
Alternative views
Alternative views
Endogenous money theory states that the supply of money is credit-driven and determined endogenously by the demand for bank loans, rather than exogenously by monetary authorities.
In an exogenous view of money multiplication, a bank lends depositors money as "excess reserves" and this fraction of the depositors money then becomes the source for new money in the banking system. For example 100 is deposited, 10% is retained as "required reserves", and 90 "excess reserves are loaned.
However there is no requirement for a bank to operate in that manner. In practice, a 10% fractional reserve bank with 10,000 reserves and 100,000 created customer deposits, can comfortably deposit a loan of 1000 into a customers current account if it can borrow 100 reserves.
In the endogenous money view therefor:
- Rather than lending customer money, the banks are extending credit and then managing the liabilities this creates for them
- Loans tend to lead to reserve creation. This is explainable because, since about 1992, the central banks are supplying reserves on demand to keep the money market cash rate at the desired target rate. Therefore if the banking system is short of reserves due to deposit expansion, the central bank is obliged to supply sufficent money to keep the money market interest rate at the target rate.
- The base money multiplier is considered to be a misleading way of describing how banks operate.
- Demand for loans from creditworthy customers becomes the driving force for deposit expansion. If a customer wants a loan, the bank can price the loan, and then borrow whatever amounts are required to maintain their fractional reserves.
In 1994 Mervyn King then Chief Economist at the Bank of England said[1] 'One of the most contentious issues in assessing the role of money is the direction of causation between money and demand. Textbooks assume that money is exogenous.... In the United Kingdom, money is endogenous'
Charles Goodhart, an economist and formerly an advisor at the Bank of England and a former monetary policy committee member, said the base money multiplier model[2] was 'such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction'[3]
What exactly[4]is so misleading about the money multiplier approach?
- Firstly the base money multiplier contains a number of assumptions that are very easy to make which is of course why it is still embedded in macroeconomics.
- Secondly, the monetary policy instruments used by central banks for some years now, are based on short term interest rates set by the central bank, not the quantity of base money. The base multiplier model requires it to set the quantity of money, but in the real world we know it sets the price.
- Thirdly if the central bank sets the interest rates it must then supply the reserves the banks require and this will depend on the demand for loans at the going rate of interest. Therefore the money supply is determined by the economy rather than the central bank.
Howells has managed to incorporate the main points of the endogenous view on the money-supply process into a macroeconomics textbook[5].
In 2007 Paul Tucker[6], outlined some of the practical implications of endogenous money in the UK.
"The economic literature....assumed (i) that a monetary policy tightening is effected by the central bank withdrawing reserves....(ii) that banks are required to hold a proportion of transactions deposits in reserves.... The first two steps seem archaic. We control....the price....of....central bank money....and, in the UK, banks choose their own reserves targets rather than having them determined by a balance sheet ratio of some kind....banks....in the short run....lever up their balance sheets and expand credit at will....banks extend credit by simply increasing the borrowing customer’s current account....banks extend credit by creating money"
Andrewedwardjudd (talk) 16:29, 14 April 2011 (UTC)andrewedwardjudd
Seth B. Carpenter and Selva Demiralp have written of their skepticism of the money multiplier mechanism.[7]
Also, the idea that the reserve requirement places an upper limit on the money supply is disputed by some economists outside of the mainstream.[8] Notably, theories of endogenous money date to the 19th century, and were subscribed to by Joseph Schumpeter, and later the post-Keynesians.[9] Endogenous money theory states that the supply of money is credit-driven and determined endogenously by the demand for bank loans, rather than exogenously by monetary authorities.
Money exo- and endogeneity in the evolution of financial institutions and monetary policy implementation
"In what follows we shall take heed of Hicks (1967, p. 153) who advised that “monetary theory… cannot avoid a relation to reality. It belongs to monetary history in a way that economic theory does not always belong to economic history.” Accordingly, this section reviews the evolution of monetary and financial institutions of the Western world and argues that the assumption of exogenous money and the multiplier model of the money-supply process constitute a largely accurate description of the financial system up to the first half of the twentieth century. However, modern institutional conditions, as well as the monetary policy framework in operation, are much better understood from the perspective of endogenous money view in the vein of the bank-centric model of money supply process." (Jablecki, J. page 38)
Alan Holmes, who was at the time a Senior Vice President of the Federal Reserve Bank of New York responsible for open market operations wrote in the 1960's "In the real world, banks extend credit, creating deposits in the process, and look for 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"[10]
Also from the 1960's a work book on bank reserves and deposit expansion from the Federal Reserve Bank of Chicago explains in the opening paragraph[11] "The relationships shown are based on simplifying assumptions. For the sake of simplicity, the relationships are shown as if they were mechanical, but they are not, as is described later in the booklet. Thus, they should not be interpreted to imply a close and predictable relationship between a specific central bank transaction and the quantity of money"
Later in the booklet it says
"Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000. Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system."
and
"In the real world, a bank's lending is not normally constrained by the amount of excess reserves it has at any given moment. Rather, loans are made, or not made, depending on the bank's credit policies and its expectations about its ability to obtain the funds necessary to pay its customers' checks and maintain required reserves in a timely fashion"
This booklet was last updated in 1992.
Seth B. Carpenter and Selva Demiralp have written of their skepticism of the money multiplier mechanism.[12]
Also, the idea that the reserve requirement places an upper limit on the money supply is disputed by some economists outside of the mainstream.[13] Notably, theories of endogenous money date to the 19th century, and were subscribed to by Joseph Schumpeter, and later the post-Keynesians.[14] Endogenous money theory states that the supply of money is credit-driven and determined endogenously by the demand for bank loans, rather than exogenously by monetary authorities.
In 1994 Mervyn King then Chief Economist at the Bank of England said[15] 'One of the most contentious issues in assessing the role of money is the direction of causation between money and demand. Textbooks assume that money is exogenous. It is sometimes dropped by helicopters, as in Friedman’s analysis of a ‘pure’ monetary expansion, or its supply is altered by open-market operations. In the United Kingdom, money is endogenous - the Bank [of England] supplies base money on demand at its prevailing interest rate, and broad money is created by the banking system. Therefore the endogeneity of money has caused great confusion, and led some critics to argue that money is unimportant. This is a serious mistake'
Charles Goodhart, an economist and formerly an advisor at the Bank of England and a former monetary policy committee member, worked for many years to encourage a different approach to money supply analysis and said the base money multiplier model[16] was 'such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction'[17] Ten years later he said[18] ‘Almost all those who have worked in a [central bank] believe that this view is totally mistaken; in particular, it ignores the implications of several of the crucial institutional features of a modern commercial banking system....’
What exactly[19]is so misleading about the money multiplier approach?
- Firstly the base money multiplier contains a number of assumptions that are very easy to make which is of course why it is still embedded in macroeconomics.
- Secondly, the monetary policy instruments used by central banks for some years now, are based on short term interest rates set by the central bank, not the quantity of base money. The base multiplier model requires it to set the quantity of money, but in the real world we know it sets the price.
- Thirdly if the central bank sets the interest rates it must then supply the reserves the banks require and this will depend on the demand for loans at the going rate of interest. Therefore the money supply is determined by the economy rather than the central bank.
In 2004 Paul Tucker at the BOE wrote, [20]"When, ten years ago, Mervyn King delivered a lecture...., he reviewed ideas on the monetary transmission mechanism....... and the role of money (and credit). These days most such accounts.....begin with a simple assertion that the central bank sets the short-term nominal interest rate. And they go on to explain how, given sticky wages and prices, that enables the central bank to shift the short-term real interest rate in a way that either restrains or stimulates aggregate demand. Notice no mention of money here. On this view of the world and, in particular, given this way of implementing monetary policy, money – both narrow and broad – is largely endogenous. The central bank simply supplies whatever amount of base money is demanded by the economy at the prevailing level of interest rates".
Howells and Bain (2005) have managed to incorporate the main points of the endogenous view on the money-supply process into a macroeconomics textbook. (Jablecki, J. page 37)
Charles Goodhart said in 2007, "[When the] Central Bank sets interest rates, as is the generality, the money stock is a dependent, endogenous variable. This is exactly what the heterodox, Post- Keynesians, from Kaldor, through Vicky Chick, and on through Basil Moore and Randy Wray, have been correctly claiming for decades, and I have been in their party on this." [21]
Bank lending
In 2007 Paul Tucker[22], outlined some of the practical implications of endogenous money in the UK.
On pages 6-7 he said
"All this brings back into focus the potential macroeconomic relevance of bank lending.
Bank lending
The economic literature on the ‘bank lending’ channel of the Monetary Transmission Mechanism explores the conditions under which a tightening of monetary policy causes the terms on bank lending to tighten over and above the increase in risk-free short-term real rates. The literature has typically assumed (i) that a monetary policy tightening is effected by the central bank withdrawing reserves from the system (or slowing the pace of reserves injection); (ii) that banks are required to hold a proportion of transactions deposits in reserves, so that reduced reserves provision entails slower deposit growth; and (iii) that they do not have unrestricted access to liabilities that are not subject to reserves requirements, and so cannot fill the gap left by slower deposit growth and must, instead, slow loan growth, which they do by tightening credit conditions. The first two steps seem archaic. We effect monetary policy changes by controlling the price not the quantity of central bank money in the system; and, in the UK, banks choose their own reserves targets rather than having them determined by a balance sheet ratio of some kind."
And on page 9-10 he said
"Where does this leave money (or Money), the starting point for much traditional monetary analysis?
Well, much that I have said about banks – their capacity, in the short run, to lever up their balance sheets and expand credit at will; their role in providing liquidity insurance to investment vehicles and corporates – turns precisely on their liabilities being money. And for this reason, banks are after all decisively different from other intermediaries.
As transactions balances and so the means of exchange in our payments system, the moneyness of bank deposits lies at the core of credit intermediation. Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank ‘writing a cheque on itself’. That is, banks extend credit by creating money. This ‘money creation’ process is constrained: by their need to manage the liquidity risk – from the withdrawal of deposits and the drawdown of backup lines – to which it exposes them. Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence."
"Hence the appearance of the balance sheet: many small short term deposits matching fewer, larger long term loans. But deposits do not cause the loans, rather loans create deposits" Howells book page 33
Banks with surplus "excess reserves" loan those reserves to other financial institutions - howells P36
References
- "King Mervyn, The transmission mechanism of monetary policy" (PDF). Bank of England.
- "Glen Stevens, the Australian Economy: Then and now". Reserve Bank of Australia.
money multiplier, as an introduction to the theory of fractional reserve banking. I suppose students have to learn that, and it is easy to teach, but most practitioners find it to be a pretty unsatisfactory description of how the monetary and credit system actually works. In large part, this is because it ignores the role of financial prices in the process.
- "Goodhart C A E (1984( Monetary Policy in Theory and Practice p.188. I have not seen, cited in Monetary Policy Regimes: a fragile consensus. Peter Howells and Iris Biefang-Frisancho Mariscal" (PDF). University of the West of England, Bristol.
The base-multiplier model of money supply determination (which lies behind the exogenously determined money stock of the LM curve) was condemned years ago as 'such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction ...'(Goodhart 1984. Page 188)
- "Howells and Bain (2005) I have not seen, cited in "Show me the money" – or how the institutional aspects of monetary policy implementation render money supply endogenous. Juliusz Jablecki. Page 37" (PDF). Bank and Credit, the scientific journal of the national bank of Poland.
- "Paul Tucker, 2007.12.13, Money and credit: Banking and the Macroeconomy" (PDF). Bank of England.
- http://www.federalreserve.gov/pubs/feds/2010/201041/index.html Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?
- http://college.holycross.edu/RePEc/eej/Archive/Volume18/V18N3P305_314.pdf Understanding the Remarkable Survival of Multiplier Models of Money Stock Determination. Eastern Economic Journal, 1992, vol. 18, issue 3, pages 305-314
- "Modern Money Mechanics. Page 37. Money Creation and Reserve Management" (PDF). Federal Reserve Bank of Chicago.
- http://www.federalreserve.gov/pubs/feds/2010/201041/index.html Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?
- http://college.holycross.edu/RePEc/eej/Archive/Volume18/V18N3P305_314.pdf Understanding the Remarkable Survival of Multiplier Models of Money Stock Determination. Eastern Economic Journal, 1992, vol. 18, issue 3, pages 305-314
- "King Mervyn, The transmission mechanism of monetary policy" (PDF). Bank of England.
- "Glen Stevens, the Australian Economy: Then and now". Reserve Bank of Australia.
money multiplier, as an introduction to the theory of fractional reserve banking. I suppose students have to learn that, and it is easy to teach, but most practitioners find it to be a pretty unsatisfactory description of how the monetary and credit system actually works. In large part, this is because it ignores the role of financial prices in the process.
- "Goodhart C A E (1984( Monetary Policy in Theory and Practice p.188. I have not seen, cited in Monetary Policy Regimes: a fragile consensus. Peter Howells and Iris Biefang-Frisancho Mariscal" (PDF). University of the West of England, Bristol.
The base-multiplier model of money supply determination (which lies behind the exogenously determined money stock of the LM curve) was condemned years ago as 'such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction ...'(Goodhart 1984. Page 188)
- "Goodhart C. (1994), What Should Central Banks Do? What Should Be Their Macroeconomic objectives and Operations?, The Economic Journal, 104, 1424–1436 I have not seen, cited in "Show me the money" – or how the institutional aspects of monetary policy implementation render money supply endogenous. Juliusz Jablecki" (PDF). Bank and Credit, the scientific journal of the national bank of Poland.
- "Charles Goodhart, 2007.02.28, Whatever became of the monetary aggregates?" (PDF). Bank of England.
- "Paul Tucker, 2007.12.13, Money and credit: Banking and the Macroeconomy" (PDF). Bank of England.
Bank lending
In 2007 Paul Tucker(Tucker[1], outlined some of the practical implications of endogenous money in the UK.
On pages 6-7 he said
"All this brings back into focus the potential macroeconomic relevance of bank lending.
Bank lending
The economic literature on the ‘bank lending’ channel of the Monetary Transmission Mechanism explores the conditions under which a tightening of monetary policy causes the terms on bank lending to tighten over and above the increase in risk-free short-term real rates. The literature has typically assumed (i) that a monetary policy tightening is effected by the central bank withdrawing reserves from the system (or slowing the pace of reserves injection); (ii) that banks are required to hold a proportion of transactions deposits in reserves, so that reduced reserves provision entails slower deposit growth; and (iii) that they do not have unrestricted access to liabilities that are not subject to reserves requirements, and so cannot fill the gap left by slower deposit growth and must, instead, slow loan growth, which they do by tightening credit conditions. The first two steps seem archaic. We effect monetary policy changes by controlling the price not the quantity of central bank money in the system; and, in the UK, banks choose their own reserves targets rather than having them determined by a balance sheet ratio of some kind."
And on page 9-10 he said
"Where does this leave money (or Money), the starting point for much traditional monetary analysis?
Well, much that I have said about banks – their capacity, in the short run, to lever up their balance sheets and expand credit at will; their role in providing liquidity insurance to investment vehicles and corporates – turns precisely on their liabilities being money. And for this reason, banks are after all decisively different from other intermediaries.
As transactions balances and so the means of exchange in our payments system, the moneyness of bank deposits lies at the core of credit intermediation. Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank ‘writing a cheque on itself’. That is, banks extend credit by creating money. This ‘money creation’ process is constrained: by their need to manage the liquidity risk – from the withdrawal of deposits and the drawdown of backup lines – to which it exposes them. Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence."
shortened version of tucker quotation
In 2007 Paul Tucker[2], outlined some of the practical implications of endogenous money on UK banking.
On pages 6-7 he said
"this brings back into focus the potential macroeconomic relevance of bank lending.
Bank lending
The economic literature....has typically assumed (i) that a monetary policy tightening is effected by the central bank withdrawing reserves from the system (or slowing the pace of reserves injection); (ii) that banks are required to hold a proportion of transactions deposits in reserves, so that reduced reserves provision entails slower deposit growth; and iii.....The first two steps seem archaic. We ....control.... the price not the quantity of central bank money in the system; and, in the UK, banks choose their own reserves targets rather than having them determined by a balance sheet ratio of some kind."
And on page 9-10 he said
"Where does this leave money (or Money), the starting point for much traditional monetary analysis?
....banks....in the short run,....lever up their balance sheets and expand credit at will....banks extend credit by simply increasing the borrowing customer’s current account....banks extend credit by creating money. This ‘money creation’ process is constrained: by their need to manage the liquidity risk – from the withdrawal of deposits and the drawdown of backup lines – to which it exposes them."
comparing the two models
Comparing lending models
In the discussion so far we have only considered a credit model of lending where loans demanded by customers leads to central bank money being created as required for the commercial banks.
There are therefore two models of lending to consider:
- 1. a relending model using existing deposits to create loans
- 2. a credit model where deposits are created from loans when customers request loans and the liabilities this creates are then managed by the bank - using other currently available on demand money systems, as per Tuckers comments above.
The relending model as as follows
For this model, if a bank has 100 reserves and 100 customer deposits the bank can only create 90 in new loans with a single loan. According to this model, if a customer wanted a loan of 171 credited to their current account, then two loans would have to be done as follows for a bank using a fractional reserve of 10%.
Note: At stage a) The bank is required to retain 10 reserves to back 100 newly created deposit money and at stage b) it is required to retain another 9 reserves, and then at stage c) it needs to retain another 8.1 reserves
| Table 1: Private bank T-account | |
|---|---|
| Assets | Liabilites |
| (a) 100 paper dollars deposited | 100 created deposit money owed to customer 1 |
| (b) Borrower's IOU worth $90 | 90 created deposit money owed to customer 2 |
| (c) Borrower's IOU worth $81 | 81 created deposit money owed to customer 2 |
The bank now has 27.1 "required reserves" and 72.9 "excess reserves"
The credit money model is as follows
Note: at stage a) (as for the relending model) The bank is required to retain 10 reserves to back 100 newly created deposit money and at stage b) it is required to retain another 17.1 reserves
| Table 1: Private bank T-account | |
|---|---|
| Assets | Liabilites |
| (a) 100 paper dollars deposited | 100 created deposit money owed to customer 1 |
| (b) Borrower's IOU worth $171 | 171 created deposit money owed to customer 2 |
The bank now has 27.1 "required reserves" and 72.9 "excess reserves"
The results are the same and there is no requirement for stage c)
The relending model mainly focuses on cash/Gold loans rather than bank credit. The relending model is, as Tucker put it, archaic in the context of modern banking systems and practices.
Joining Talks Request Sent
Hi!^^ I have contacted everyone:
- http://en.wikipedia.org/wiki/User_talk:Lawrencekhoo#Hi_Wonderful_Person.21.21.5E.5E
- http://en.wikipedia.org/wiki/User_talk:Bobrayner#Hi_Wonderful_Person.21.21.5E.5E
- http://en.wikipedia.org/wiki/User_talk:BigK_HeX#Hi_Wonderful_Person.21.21.5E.5E
- http://en.wikipedia.org/wiki/User_talk:Reissgo#Joining_Talks_Request_Sent
I request, merely in case it needs to be made known, to please not say or do anything that makes it seem like a person is "hostile" when obviously a person is not. We are trying to solve something. That is the only goal that matters. In the event that the sent request to join talks fails, this may be evidenced in the higher levels of disputes. Thank you kindly. rm2dance (talk) 03:38, 21 April 2011 (UTC)
Neutral Mediator helps Wonderful people, obviously not hostile, and difficult andrewedwardjudd solve problem.
Is this really how wiki operates? The mediation editor gets created after i ask for help and then writes this to each side
Hi Wonderful person! If the requesting party "Andrewedwardjudd" (who also would like solve the problem) is making it difficult, and the problem comes to no resolution, then the case will simply be closed.
Versus.
Hi, please not say or do anything that makes it seem like a person is "hostile" when obviously a person is not.
Evidently this is just another childish game to obfuscate and waste peoples time when the objective is no change at all.
modern banking practices
A number of highly respected central bankers and monetary economists believe the money multiplier is a very unsatisfactory way of describing how credit is created in the real world[3], mainly because it ignores the influences of prices[4], and the way that modern central banking manages the money supply.
From about 1991 a remarkable consensus had emerged within developed economies about the optimum design of monetary policy methods. In essence central bankers gave up attempts to directly control the amount of money in the economy and instead moved to indirect methods by targeting interest rates[5].
Additionally, although when you look at a banks balance sheet, it appears new deposits are causing loans to be created, in reality banks create credit so that new loans create new deposits[6] in the banking system. (Howells P. Page 33)
Therefore banks do not as a policy 'lend their customers money' but rather as a policy 'they lever[7], their balance sheet' by creating commercial bank money, while simultaneously managing the liquidity risk this creates for them.
In practice, rather than lending available "excess reserves" as a customer lending policy, as described in the base money multiplier model, banks tend to lend their "excess reserves" to other financial institutions - often on an overnight basis, so that they have these deposits available earning interest, while still being available to meet customer withdrawal requests. (Howells P, Page 36)
Seth B. Carpenter, a monetary policy and financial markets researcher at the Board of Governors of the Federal Reserve System and Selva Demiralp concluded[8] the simple textbook base money multiplier is implausible in the United States.
Also, the idea that the reserve requirement places an upper limit on the money supply is disputed by some economists[9], including for example the former chief economist of the Bank of England and current Governor, Mervyn King, and the UK's foremost central banking economist Charles Goodhart. In 2007, Goodhart said[10], "[When the] Central Bank sets interest rates, as is the generality, the money stock is a dependent, endogenous variable. This is exactly what the heterodox, Post-Keynesians, from Kaldor, through Vicky Chick, and on through Basil Moore and Randy Wray, have been correctly claiming for decades, and I have been in their party on this."
Theories of endogenous money date to the 19th century, and were described by Joseph Schumpeter, and later the post-Keynesians.[11] Endogenous money theory states that the supply of money is credit-driven and determined endogenously by the demand for bank loans, rather than exogenously by monetary authorities.
In 1994, Mervyn King said[12] 'One of the most contentious issues in assessing the role of money is the direction of causation between money and demand. Textbooks assume that money is exogenous. It is sometimes dropped by helicopters, as in Friedman’s analysis of a ‘pure’ monetary expansion, or its supply is altered by open-market operations. In the United Kingdom, money is endogenous - the Bank [of England] supplies base money on demand at its prevailing interest rate, and broad money is created by the banking system. Therefore the endogeneity of money has caused great confusion, and led some critics to argue that money is unimportant. This is a serious mistake'
Goodhart, formerly an advisor at the Bank of England and a former monetary policy committee member, worked for many years to encourage a different approach to money supply analysis and said the base money multiplier model was 'such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction'[13] Ten years later he said[14] ‘Almost all those who have worked in a [central bank] believe that this view is totally mistaken; in particular, it ignores the implications of several of the crucial institutional features of a modern commercial banking system....’
Because of these[15][16] modern banking systems, banks are not truelly lending existing central bank money, but are instead creating money while managing the liabilities this creates for them by having lines of credit, and access to a highly liquid money market - at rates near to those targeted by the central bank. It is true the banks are continually getting deposits of central bank money, and they are most certainly paying out central bank money as required, but deposits do not create loans but rather demand for loans creates deposits. After a loan is demanded, and existing sources of central bank money are sought, as required, whatever additional Central bank money necessary to achieve a banking system balance, at the prevailing central bank policy rate[17], is supplied on demand, at a price, by the central banks (King 1994).
payments systems
In practice, Banks creating large value loans can borrow the loan money in real time by systems operated by major central banks, where it is established practice the central banks will support the payments systems during the day, via overdraft or repurchase agreement.[18][19][20][21]. Endogenous money proponents then argue the banks can borrow whatever they need to settle with the central bank from the money market before the end of the day.
monetary targeting abandoned
http://www.bis.org/review/r060616e.pdf Third, it is well established that the short-term monetary interest rate is the instrument of monetary policy and not any quantitative monetary variable.
alternate view
Alternative views
Theories of endogenous money date to the 19th century, and were described by Joseph Schumpeter, and later the post-Keynesians.[22] Endogenous money theory states that the supply of money is credit-driven and determined endogenously by the demand for bank loans, rather than exogenously by monetary authorities.
Though not a mainstream economic belief, a number of central bankers and monetary economists believe the money multiplier or relending model, is a very unrealistic way of describing how banking works in practice.[23][24][25][26][27]
Charles Goodhart, an authority on central banking, worked for many years to encourage a different approach to money supply analysis and said the base money multiplier model was "such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction"[28] Ten years later he said: "Almost all those who have worked in a [central bank] believe that this view is totally mistaken; in particular, it ignores the implications of several of the crucial institutional features of a modern commercial banking system..."[29] . Goodhart has characterized the money stock as a dependent endogenous variable.[30] In 1994, Mervyn King said that the causation between money and demand is a contentious issue. He notes that in the United Kingdom money is endogenous, as the Bank of England provides base money on demand and broad money is created by the banking system.[31][32][33]
Seth B. Carpenter and Selva Demiralp concluded the simple textbook base money multiplier is implausible in the United States.[34]
A number of central bankers and economists propose that, rather than deposits leading to loans, causality is reversed, and loans lead to deposits.[35][36][37][38][39] (Howells P, Page 33)
FRB definition revisited
Currently the page begins
- Fractional-reserve banking is the banking practice in which only a fraction of a bank's deposits are kept as reserves (cash and other highly liquid assets) available for withdrawal.[45][46][47][48]The bank lends out some or most of the deposited funds, while still allowing all deposits to be withdrawn upon demand.
Back in November 2010 a few people were working towards improving the text.
http://en.wikipedia.org/w/index.php?title=Fractional-reserve_banking&diff=394905000&oldid=394658401
I noticed that "backed by" has been changed to "kept as". I think this has the same unclarity that "backed by" has. What about saying that "only a fraction of deposits can be withdrawn on-demand" with the possible qualification "even though all deposits are promised to be withdrawable on-demand". Maybe theres a less long winded way to say this. Fresheneesz (talk) 01:00, 10 November 2010 (UTC)
My suggested version of the text is
- Fractional-reserve banking is the banking practice in which only a fraction of the total money value of customer deposits is kept as reserves (cash and other highly liquid assets) for expected customer withdrawals.[49][50][51][52]The bank lends out some or most of the deposited funds, while still allowing each customer to make withdrawals on demand.
The important point being that customer deposits inside the bank are IOU money and a fraction of the customers existing deposits is not kept as reserves which is outside money. They are different monies.
that Flash Video software or a web browser supporting H.264/MPEG-4 AVC is necessary to see the content.
- "Paul Tucker, 2007.12.13, Money and credit: Banking and the Macroeconomy" (PDF). Bank of England.
- "Paul Tucker, 2007.12.13, Money and credit: Banking and the Macroeconomy" (PDF). Bank of England.
- "(Holmes, 1969 page 73 at the time Senior Vice President of the Federal Reserve Bank of New York responsible for open market operations) I have not seen, cited in Bank and Credit the Scientific Journal of the National Bank of Poland" (PDF).
In the real world, banks extend credit, creating deposits in the process, and look for 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… ...'
- "Glen Stevens, the Australian Economy: Then and now". Reserve Bank of Australia.
money multiplier, as an introduction to the theory of fractional reserve banking. I suppose students have to learn that, and it is easy to teach, but most practitioners find it to be a pretty unsatisfactory description of how the monetary and credit system actually works. In large part, this is because it ignores the role of financial prices in the process.
- "Monetary Policy Regimes: a fragile consensus, Peter Howells and Iris Biefang-Frisancho Mariscal (2006)" (PDF). University of the West of England, Bristol.
- "Paul Tucker, Money and credit: Banking and the Macroeconomy" (PDF). Bank of England.
Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer's current account, which can be paid away to wherever the borrower wants by the bank 'writing a cheque on itself'. That is, banks extend credit by creating money. This 'money creation' process is constrained by their need to manage the liquidity risk from the withdrawal of deposits and the drawdown of backup lines to which it exposes them. Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence ...'
- http://www.federalreserve.gov/pubs/feds/2010/201041/index.html Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist? Conclusions
- http://college.holycross.edu/RePEc/eej/Archive/Volume18/V18N3P305_314.pdf Understanding the Remarkable Survival of Multiplier Models of Money Stock Determination. Eastern Economic Journal, 1992, vol. 18, issue 3, pages 305-314
- "Charles Goodhart, 2007.02.28, Whatever became of the monetary aggregates?" (PDF). Bank of England.
- "King Mervyn, The transmission mechanism of monetary policy" (PDF). Bank of England.
- "Goodhart C A E (1984( Monetary Policy in Theory and Practice p.188. I have not seen, cited in Monetary Policy Regimes: a fragile consensus. Peter Howells and Iris Biefang-Frisancho Mariscal" (PDF). University of the West of England, Bristol.
The base-multiplier model of money supply determination (which lies behind the exogenously determined money stock of the LM curve) was condemned years ago as 'such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction ...'(Goodhart 1984. Page 188)
- "Goodhart C. (1994), What Should Central Banks Do? What Should Be Their Macroeconomic objectives and Operations?, The Economic Journal, 104, 1424–1436 I have not seen, cited in "Show me the money" – or how the institutional aspects of monetary policy implementation render money supply endogenous. Juliusz Jablecki" (PDF). Bank and Credit, the scientific journal of the national bank of Poland.
- "The fedwire funds service. Overdrafts and risk control" (PDF). Federal Reserve.
the Federal Reserve Banks can extend credit to most Fedwire Funds Service participants lacking sufficient balances to cover their payment instructions. This exposes the Federal Reserve Banks to risk of loss. To limit exposure, the Federal Reserve Banks have adopted a comprehensive daylight overdraft control policy ...'
- "What is a daylight overdraft at the Fed?". Federal Reserve.
{{cite web}}: Cite has empty unknown parameter:|1=(help) - "Paul Tucker, Managing the central bank's balance sheet: Where monetary policy meets financial stability" (PDF). Bank of England.
The central bank simply supplies whatever amount of base money is demanded by the economy at the prevailing level of interest rates.
- "The fedwire funds service. Overdrafts and risk control" (PDF). Federal Reserve.
the Federal Reserve Banks can extend credit to most Fedwire Funds Service participants lacking sufficient balances to cover their payment instructions. This exposes the Federal Reserve Banks to risk of loss. To limit exposure, the Federal Reserve Banks have adopted a comprehensive daylight overdraft control policy ...'
- "What is a daylight overdraft at the Fed?". Federal Reserve.
{{cite web}}: Cite has empty unknown parameter:|1=(help) - "The Automated Intra-day Repurchase Agreement Function". Reserve Bank of Australia.
{{cite web}}: Cite has empty unknown parameter:|1=(help) - "Payment and Settlement Systems". Bank of England.
{{cite web}}: Cite has empty unknown parameter:|1=(help) - "Glen Stevens, the Australian Economy: Then and now". Reserve Bank of Australia.
money multiplier, as an introduction to the theory of fractional reserve banking. I suppose students have to learn that, and it is easy to teach, but most practitioners find it to be a pretty unsatisfactory description of how the monetary and credit system actually works. In large part, this is because it ignores the role of financial prices in the process.
- "White, W. Changing views on how best to conduct monetary policy: the last fifty years". Bank for International Settlements.
Some decades ago, the academic literature....emphasised the importance of the reserves supplied by the central bank....., and the implications (via the money multiplier) for the growth of money and credit. Today, it is more broadly understood that no industrial country conducts policy in this way under normal circumstances....there has been a decisive shift towards the use of short-term interest rates as the policy instrument [in industrialised countries]. In this framework, cash reserves supplied to the banking system are whatever they have to be to ensure that the desired policy rate is in fact achieved.
- "Freedman, C. Reflections on Three Decades at the Bank of Canada" (PDF). Bank of Canada.
It used to be that most academic research treated money (or sometimes base) as the exogenous policy instrument under the control of the central bank. This was an irritant to those of us working in central banks, because the instrument of policy had always been the short-term interest rate, and because all monetary aggregates (beyond base) have always been and remain endogenous. In recent years, more and more academics, in specifying their models, have treated the short-term interest rate as the policy instrument, thereby increasing the usefulness of their analyses...
{{cite web}}: line feed character in|quote=at position 369 (help) - http://college.holycross.edu/RePEc/eej/Archive/Volume18/V18N3P305_314.pdf Understanding the Remarkable Survival of Multiplier Models of Money Stock Determination. Eastern Economic Journal, 1992, vol. 18, issue 3, pages 305-314
- "Goodhart C A E (1984( Monetary Policy in Theory and Practice p.188. I have not seen, cited in Monetary Policy Regimes: a fragile consensus. Peter Howells and Iris Biefang-Frisancho Mariscal" (PDF). University of the West of England, Bristol.
The base-multiplier model of money supply determination (which lies behind the exogenously determined money stock of the LM curve) was condemned years ago as 'such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction ...'(Goodhart 1984. Page 188)
- "Goodhart C. (1994), What Should Central Banks Do? What Should Be Their Macroeconomic objectives and Operations?, The Economic Journal, 104, 1424–1436 I have not seen, cited in "Show me the money" – or how the institutional aspects of monetary policy implementation render money supply endogenous. Juliusz Jablecki" (PDF). Bank and Credit, the scientific journal of the national bank of Poland.
- "Charles Goodhart, 2007.02.28, Whatever became of the monetary aggregates?" (PDF). Bank of England.
- "King Mervyn, The transmission mechanism of monetary policy" (PDF). Bank of England.
- "Paul Tucker, Managing the central bank's balance sheet: Where monetary policy meets financial stability" (PDF). Bank of England.
given this way of implementing monetary policy, money – both narrow and broad – is largely endogenous. The central bank simply supplies whatever amount of base money is demanded by the economy at the prevailing level of interest rates.
{{cite web}}: line feed character in|quote=at position 37 (help) - "Razzak, W. Money in the Era of Inflation Targeting" (PDF). Reserve Bank of New Zealand.
In New Zealand....money supply is endogenous
- http://www.federalreserve.gov/pubs/feds/2010/201041/index.html Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist? Conclusions
- "(Holmes, 1969 page 73 at the time Senior Vice President of the Federal Reserve Bank of New York responsible for open market operations) I have not seen, cited in Bank and Credit the Scientific Journal of the National Bank of Poland" (PDF).
In the real world, banks extend credit, creating deposits in the process, and look for 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… ...'
- "Modern Money Mechanics. Page 37. Money Creation and Reserve Management" (PDF). Federal Reserve Bank of Chicago.
Page 7. Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000. Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system. Page 37. In the real world, a bank's lending is not normally constrained by the amount of excess reserves it has at any given moment. Rather, loans are made, or not made, depending on the bank's credit policies and its expectations about its ability to obtain the funds necessary to pay its customers' checks and maintain required reserves in a timely fashion ...'
- "Disyatat, P. 2010 The bank lending channel revisited" (PDF). Bank for International Settlements.
Page 2. the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Page 7 When a loan is granted, banks in the first instance create a new liability that is issued to the borrower. This can be in the form of deposits or a cheque drawn on the bank, which when redeemed, becomes deposits at another bank. A well functioning interbank market overcomes the asynchronous nature of loan and deposit creation across banks. Thus loans drive deposits rather than the other way around.
{{cite web}}: line feed character in|quote=at position 84 (help) - "Montador, B. The implementation of monetary policy in Canada" (PDF). Bank of Canada.
Required reserves have traditionally been justified by a desire to influence the size of the money multiplier and by prudential concerns. However, central banks' views about money supply determination have for a long time been that the money stock is demand determined
{{cite web}}: line feed character in|quote=at position 89 (help) - "Paul Tucker, Money and credit: Banking and the Macroeconomy" (PDF). Bank of England.
banks....in the short run.....lever up their balance sheets and expand credit at will....Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer's current account.....This 'money creation' process is constrained by their need to manage the liquidity risk from the withdrawal of deposits and the drawdown of backup lines to which it exposes them.
- Charles Goodhart, 2010. Money, Credit and Bank Behaviour: Need for a new approach. "The standard approach, in teaching and textbooks....that centred around the money multiplier...should be discarded immediately. The practical realities, whereby the central bank and the commercial bank set the interest rates at which they will operate, and then the various agents in the private sector and amongst the banks determine monetary quantities endogenously, is more complex but has the advantage of realism"
- "Prof Richard Werner describes credit creation". WWW.the-free-lunch.com.
- "Mervyn King, Finance: A Return from Risk" (PDF). Bank of England.
Banks are dangerous institutions. They borrow short and lend long. They create liabilities which promise to be liquid and hold few liquid assets themselves. That though is hugely valuable for the rest of the economy. Household savings can be channelled to finance illiquid investment projects while providing access to liquidity for those savers who may need it.... If a large number of depositors want liquidity at the same time, banks are forced into early liquidation of assets – lowering their value ...'
- "Paul Tucker, Managing the central bank's balance sheet: Where monetary policy meets financial stability" (PDF). Bank of England.
This reflects .... the way risk is managed in a fractional-reserve banking system....Commercial banks....in the business of providing liquidity insurance to their customers – via deposits withdrawable on demand....are themselves inherently susceptible to liquidity crises. In consequence, customers want to be assured that banks can maintain convertibility into central bank money (notes).....the largest banks cannot buy liquidity insurance from each other without incurring an unacceptable level of (contingent) counterparty credit risk. They have to self insure, which they do by holding high-quality assets that can be exchanged at the central bank for 'cash' – or, rather, for a credit to their account at the central bank. ...'
- "Nigel Jenkinson, Strengthening Regimes for Controlling Liquidity Risk: Some Lessons from the Recent Turmoil" (PDF). Bank of England.
Commercial banks ....are inherently exposed to liquidity risk – the risk that a bank is unable to meet its commitments should depositors attempt to withdraw their funds ahead of the bank's capacity to repay them....There is, however, one last line of defence left. A bank holding a buffer of reliable high quality liquid assets, such as Treasury bills or other government securities, can draw on them immediately and directly in the event of a sudden withdrawal of market liquidity.'
- The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors by Jonathan Golin. Publisher: John Wiley & Sons (August 10, 2001). ISBN 0471842176 ISBN 978-0471842170
- The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors by Jonathan Golin. Publisher: John Wiley & Sons (August 10, 2001). ISBN 0471842176 ISBN 978-0471842170