Growing Evidence That The Upturn Is Upon Us
Join Date: Oct 2005
Location: UK
Posts: 42
Likes: 0
Received 0 Likes
on
0 Posts
"A bank has a million pounds. It lends all of it to me in exchange for a piece of paper called a loan agreement where I promise to pay it back plus interest. This piece of paper is a debt. As such a bank is allowed to call 8/9ths of it an asset. So it can lend out 8/9ths of a million pounds to someone else. They are compelled by international banking rules (BAsle II) to keep that ratio of 8/9th's intact. Guess what happens to the loan agreement (debt) for £900k... it is used to issue £720k of new loans. Which spawns £648k of new loans, which spawns.. you get the idea. Your £1m loan turns into a multi million pound lending frenzy. "
WWW that is not true I am afraid. Loans sit on a banks balance sheet as "assets" on the other side of the balance sheet they have to be funded by either deposits or wholesale funding. If a bank wants to make a loan it has to get the funding from somewhere. Problem in the UK is the banking system has a loan/deposit ratio of c140% i.e. we are overlent. The gap was made up by "wholesale" funding which is typically where the excess loans were chopped up in to debt securities such as ABS (asset backed securities) and sold to investors or the bank issues debt of its own to investors (i.e. pensions funds etc). The problem is now the wholesale funding markets are shut due to the economic mess we are in which means bank balance sheets need to shrink (i.e. get the 140% down to c100%). Bottom line is if a bank wants to make a loan it has to get the funding from somewhere. The magic mutlipier you imply does not actually exist. For every £ a banks lends it has to raise a £ in funding somewhere.
The Basle accord is about capital not funding. It determines how much capital a bank must hold to protect depositors against defaulting loans. Unfortunately UK banks are woefully short of capital.
More than happy to bore you silly over a beer as to the in and outs of how bank balance sheets work and how the UK stacks up vs banking systems around the world.
WWW that is not true I am afraid. Loans sit on a banks balance sheet as "assets" on the other side of the balance sheet they have to be funded by either deposits or wholesale funding. If a bank wants to make a loan it has to get the funding from somewhere. Problem in the UK is the banking system has a loan/deposit ratio of c140% i.e. we are overlent. The gap was made up by "wholesale" funding which is typically where the excess loans were chopped up in to debt securities such as ABS (asset backed securities) and sold to investors or the bank issues debt of its own to investors (i.e. pensions funds etc). The problem is now the wholesale funding markets are shut due to the economic mess we are in which means bank balance sheets need to shrink (i.e. get the 140% down to c100%). Bottom line is if a bank wants to make a loan it has to get the funding from somewhere. The magic mutlipier you imply does not actually exist. For every £ a banks lends it has to raise a £ in funding somewhere.
The Basle accord is about capital not funding. It determines how much capital a bank must hold to protect depositors against defaulting loans. Unfortunately UK banks are woefully short of capital.
More than happy to bore you silly over a beer as to the in and outs of how bank balance sheets work and how the UK stacks up vs banking systems around the world.
Join Date: Aug 2008
Location: Betwixt and between
Posts: 666
Likes: 0
Received 0 Likes
on
0 Posts
That is what WWW said, just perhaps, I guess, not as precisely as you might have preferred and may have overstated what happens if a debt is defaulted. Nevertheless, it served the purpose of trying to get the message out that debt is the fundamental fuel of the economy.
Unfortunately, as per the old aviation saying: "The only time you have too much fuel is when you're on fire". We're on fire
Unfortunately, as per the old aviation saying: "The only time you have too much fuel is when you're on fire". We're on fire
Well I wasn't penning an undergraduate essay on the topic - just trying to convey to a wider audience that banks essentially conjure money out of thin air backed by nothing other than another debt.
I didn't even touch on the fact that the lent money can never be fully repaid as the debt plus interest is greater than the money in existence...
Money as Debt
YouTube - Money As Debt (1 of 5)
WWW
A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men Woodrow Wilson 1913, US President who signed the Federal Reserve into existence.
I didn't even touch on the fact that the lent money can never be fully repaid as the debt plus interest is greater than the money in existence...
Money as Debt
YouTube - Money As Debt (1 of 5)
WWW
A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men Woodrow Wilson 1913, US President who signed the Federal Reserve into existence.
Join Date: Aug 2008
Location: Betwixt and between
Posts: 666
Likes: 0
Received 0 Likes
on
0 Posts
WWW,
I did, several pages back. But then I don't have your charisma 
I didn't even touch on the fact that the lent money can never be fully repaid as the debt plus interest is greater than the money in existence...
Join Date: Jan 2001
Location: Around the world.
Age: 42
Posts: 606
Likes: 0
Received 0 Likes
on
0 Posts
While it seems an obvious statement, at least in the UK airline I work for, next winter onwards is apparently worrying the management a lot.
I work for a well known short haul/long haul airline which hasn't been mentioned with regards to pilot redundancies, I'm a 3 bar FO with 1400 hours Airbus, 2000 total time, I have been informed my (permanent contract) job is not assured at the moment, it is under discussion. Now I feel like a right dick purchasing a BMW that is currently sat depreciating heavily on the driveway
I work for a well known short haul/long haul airline which hasn't been mentioned with regards to pilot redundancies, I'm a 3 bar FO with 1400 hours Airbus, 2000 total time, I have been informed my (permanent contract) job is not assured at the moment, it is under discussion. Now I feel like a right dick purchasing a BMW that is currently sat depreciating heavily on the driveway
Join Date: Oct 2005
Location: UK
Posts: 42
Likes: 0
Received 0 Likes
on
0 Posts
Socioliates that isnt what WWW said. He said a bank can take $1 and turn it into $8-9... as far as I am aware post 15 years in the banking industry they can't. If banks want to lend $1 they have to raise $1 of funding to do it either via deposits or wholesale funding markets. Wholesale funding = money typically from pension funds or money market funds rather than traditional money you have on deposit with a bank, there is no making money from nothing popular as that myth is. The trick for banks to lend to $1 out at a higher interest rate than it costs them to raise it and make a spread. Banks cannot magically raise $1 of funding and turn it into $10 dollars of loans. You are mistaking banks capital base with it funding base.
WWW is well informed but talking Sh*t on this (rare) occasion. Only 1 bank in the UK can create money from nothing and it is the Bank of England because it has a printing press and literally a license to print money.
WWW is well informed but talking Sh*t on this (rare) occasion. Only 1 bank in the UK can create money from nothing and it is the Bank of England because it has a printing press and literally a license to print money.
Last edited by getoffmycloud; 24th Jan 2009 at 13:38.
As far as I'm aware Nationwide are the closest to being a bank-like institution whose loans outstanding match its deposits on account. Even then its not quite, it had something like 86% of its loan book balanced by savings deposits last time I checked.
The likes of RBS were down to something like 6% and sinking fast.
WWW
The likes of RBS were down to something like 6% and sinking fast.
WWW
YouTube - Money As Debt (2 of 5)
This 9 minute episode shows how the banks can take £1,111.12p of its own money to loan out £100,000 and collect the interest on the money that it never had.
Subconciously everybody knows that banks lend money they don't have.
WWW
This 9 minute episode shows how the banks can take £1,111.12p of its own money to loan out £100,000 and collect the interest on the money that it never had.
Subconciously everybody knows that banks lend money they don't have.
WWW
Join Date: Oct 2005
Location: UK
Posts: 42
Likes: 0
Received 0 Likes
on
0 Posts
That youtube video is total bollocks in my opinion. If a bank only has $1000 dollars of capital/funding it cannot lend out $10,000. Put it this way what if I was the borrower of the $10,000 and asked to take the money in hard cash.... where would it come from then??
Join Date: Jun 2008
Location: Just a bit lower than the point where the falling angel meets the rising ape
Posts: 213
Likes: 0
Received 0 Likes
on
0 Posts
I was the borrower of the $10,000 and asked to take the money in hard cash.... where would it come from then??
Your next question will be: What happens if everyone in a bank wants their money all at once? The answer. Northern Rock.
As for the printing money thing. With BACS and plastic, how much of the money that you "own" is ever at any one time in a hard currency format? Some ridiculous fraction of a percent, in my own case. The rest is on a computer somewhere.
I get paid by electronic transfer. I bought my last car by electronic transfer. My house purchase was an electronic transfer. I buy food with same when I pay switch. I only ever use cash down the pub!
All banking is built on confidence. When enough people start saying "show me the money" at the same time, it all goes pop.
Oh, sorry, I've just read the word "borrow" in that sentence! Alright then, you've asked to borrow 10k from me, and you want it in tenners. I say "no", and I'm making the loan, so what are you going to do? Every loan I've ever had was, wait for it.... transferred electronically into my electronic bank account!
I stand by the above as it relates to depositors. Sorry for mis-reading your post
JR
Last edited by JohnRayner; 24th Jan 2009 at 15:33. Reason: Read the subject post a little too quickly. Oops.
That youtube video is total bollocks in my opinion. If a bank only has $1000 dollars of capital/funding it cannot lend out $10,000. Put it this way what if I was the borrower of the $10,000 and asked to take the money in hard cash.... where would it come from then??
It would come in hard cash. Which would be taken around to the car dealership, handed over and then rushed back to a bank before it had a chance to close for the day.
Fractional Reserve Banking works exactly in this way. The banks conjure money out of thin air backed by a tiny amount of real money and a whole lot of other debts counted as being the same as money. The amount of money in the world is only constrained by the populations desire to take on debt. This is why we have all been pre-approved for an any purpose loan/credit card/overdraft and get sent 3 letters a week every week telling us so.
You sign that credit agreement and the bank can call that 9/10ths as good as real money and lend it out all over again and charge someone else interest on that. And so on and so on.
Many banks are bankrupt. Welcome to the real Matrix.
WWW
ps And that uTube video is spot on 100% correct and accurate. Its just so astonishing that many people find it hard to believe.
Join Date: Oct 2005
Location: UK
Posts: 42
Likes: 0
Received 0 Likes
on
0 Posts
Great so a bank balance sheets doesn't have to balance.... on one side we have $10,000 of loans.... on the other $1,000 of deposits... accountants of the world will have a heart attack. Hurrah the imaginary desposits they lend out that don't really exist.
You end up with a Northern Rock because the banks make 5 year loans with the deposits customers give to them.... if everyone trys to withdraw deposits at once the have a duration missmatch as you can't force everyone to repay there mortgages instantly so the banks runs out liquidity (in essence the deposit you and I put with the bank is lent out as a loan with the banks capital base acting as a buffer in case of default on the loan).
Take a look at a simple bank balance sheet (I would suggest Nationwide as WWW mentions).... you will find that deposits +wholesale funding + equity = loans + other investments.... wow the balance sheet balances.... if as a bank you can't raise deposits or wholesale funding you can't lend. The fact that a fraction of the money in "hard cash" is irrelevent. Banks can only lend based on the the amounts of funds (deposits or wholesale funding) they can raise.
If You can't raise incremental deposits or access wholesale funding markets you can't lend = credit crunch. In this latest credit crunch wholesale funding markets shut so banks could not roll wholesale funding hence unable to lend any more money.
If you want to make a loan as a bank you HAVE TO FUND IT on he other side of the balance sheet!! Otherwise why bother taking deposits as a bank!
You end up with a Northern Rock because the banks make 5 year loans with the deposits customers give to them.... if everyone trys to withdraw deposits at once the have a duration missmatch as you can't force everyone to repay there mortgages instantly so the banks runs out liquidity (in essence the deposit you and I put with the bank is lent out as a loan with the banks capital base acting as a buffer in case of default on the loan).
Take a look at a simple bank balance sheet (I would suggest Nationwide as WWW mentions).... you will find that deposits +wholesale funding + equity = loans + other investments.... wow the balance sheet balances.... if as a bank you can't raise deposits or wholesale funding you can't lend. The fact that a fraction of the money in "hard cash" is irrelevent. Banks can only lend based on the the amounts of funds (deposits or wholesale funding) they can raise.
If You can't raise incremental deposits or access wholesale funding markets you can't lend = credit crunch. In this latest credit crunch wholesale funding markets shut so banks could not roll wholesale funding hence unable to lend any more money.
If you want to make a loan as a bank you HAVE TO FUND IT on he other side of the balance sheet!! Otherwise why bother taking deposits as a bank!
Last edited by getoffmycloud; 24th Jan 2009 at 17:12.
"Banking was conceived in iniquity and born in sin. Bankers own the earth; take it away from them but leave them with the power to create credit; and, with a flick of a pen, they will create enough money to buy it back again. Take this power away from them and all great fortunes like mine will disappear, and they ought to disappear, for then this world would be a happier and better world to live in. But if you want to be slaves of bankers and pay the cost of your own slavery, then let the bankers control money and control credit."
And.
"Banks lend by creating credit. They create the means of payment, out of nothing."
And.
"We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon."
------------
That's off the top of my head.
I'd be happy to hear your thoughts having 15 years looking at banks balance sheets getoffmycloud.
WWW
Join Date: Oct 2005
Location: UK
Posts: 42
Likes: 0
Received 0 Likes
on
0 Posts
WWW I can only think we must be arguing about different things which is somewhat lost in translation on an internet forum!
It would be a pleasure to buy you a beer next time I am in the UK and discuss the current ills of the UK banking system. Would also be more than happy to give you a tour of our trading floor as well if that holds an interest for you.
I have actually left the UK because my concerns over the health of the UK banking system are so great that I felt it necessary to move to protect my career, my family and our standard of living. It was not a decision I took likely but the current collapse in Sterling is starting to justify the move in my mind.
I genuinely lie awake at night worrying about family and friends in the UK and what they are likely to face over the next 1-2 years. The recession we have seen to date is just warming up.... on that you and I certainly agree.
P.S evidence to date from where I am sitting would suggest the BoE and Government don't have an f'ing clue about banks and banking hence the mess we are in today... so the quotes above I read with a grin on my face.
It would be a pleasure to buy you a beer next time I am in the UK and discuss the current ills of the UK banking system. Would also be more than happy to give you a tour of our trading floor as well if that holds an interest for you.
I have actually left the UK because my concerns over the health of the UK banking system are so great that I felt it necessary to move to protect my career, my family and our standard of living. It was not a decision I took likely but the current collapse in Sterling is starting to justify the move in my mind.
I genuinely lie awake at night worrying about family and friends in the UK and what they are likely to face over the next 1-2 years. The recession we have seen to date is just warming up.... on that you and I certainly agree.
P.S evidence to date from where I am sitting would suggest the BoE and Government don't have an f'ing clue about banks and banking hence the mess we are in today... so the quotes above I read with a grin on my face.
Join Date: Jun 2008
Location: UK
Posts: 39
Likes: 0
Received 0 Likes
on
0 Posts
What Wee Weasley Welshman is describing is the Fractional Reserve System; a very real system that's in effect today and has been for many years. Start here: Fractional-reserve banking and follow the references and whatnot. There are also numerous documentaries around which confirm this, along with hard evidence from the likes of the Federal Reserve.
This is not some obscure UK system either, it is operated throughout most of the developed world. I urge you to look into this, I've been reading up on it for months now. It's very interesting (and scary) stuff.
Currency is quite literally debt, in our current system it cannot be created in any other way. Inflation and recessions are also a required feature of this system. However, bank runs, hyper inflation and recessions that lead to depression present a very real and present danger.
This is not some obscure UK system either, it is operated throughout most of the developed world. I urge you to look into this, I've been reading up on it for months now. It's very interesting (and scary) stuff.
Currency is quite literally debt, in our current system it cannot be created in any other way. Inflation and recessions are also a required feature of this system. However, bank runs, hyper inflation and recessions that lead to depression present a very real and present danger.
Originally Posted by Thomas Jefferson
If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered. - President Thomas Jefferson
Last edited by belleh; 24th Jan 2009 at 18:01. Reason: edited mistake in link + typo + quote addition
Join Date: May 2003
Location: uk
Posts: 713
Likes: 0
Received 0 Likes
on
0 Posts
Get of my cloud and WWW you are arguing over the same point and are both rightish in principle. This is how it works
The probelm has been that banks need to have the assets supported by at least 5% of their own money.
So lets look at some simple numbers.
Banks Capital 5 .....................Assets (loans to customers) 100
Loans to bank 95
total 100 ............................................................ 100
Now a customer defaults and 1 unit gets written off.
Banks Capital 4 ..............................................Assets 99
Loans to bank 95
Total 99 ............................................................ .....99
Now to stay within the capital adequacy limits the bank has to dispose of assets. This is where the rot sets in. The best assets have to go, and loans paid off.
Now we have to readjust as follows:
Banks Capital 4 ...................................................Assets 80
Loans to Bank 76
Total ............80.............................................. .............. 80
This called de leveraging. So big loses do impact the banks borrowing ability. If deleveraging is done well there might be a small profit but a forced sale could increase the loss and we have to delever again.
As the bank's capital decreases it ability to borrow decreases.
Hence we are in the mire we are in.
To rebuild a capital base banks can either get new money from shareholders or increase the profit they make from customers from charges and the spread between what they borrow at and what they lend at.
The probelm has been that banks need to have the assets supported by at least 5% of their own money.
So lets look at some simple numbers.
Banks Capital 5 .....................Assets (loans to customers) 100
Loans to bank 95
total 100 ............................................................ 100
Now a customer defaults and 1 unit gets written off.
Banks Capital 4 ..............................................Assets 99
Loans to bank 95
Total 99 ............................................................ .....99
Now to stay within the capital adequacy limits the bank has to dispose of assets. This is where the rot sets in. The best assets have to go, and loans paid off.
Now we have to readjust as follows:
Banks Capital 4 ...................................................Assets 80
Loans to Bank 76
Total ............80.............................................. .............. 80
This called de leveraging. So big loses do impact the banks borrowing ability. If deleveraging is done well there might be a small profit but a forced sale could increase the loss and we have to delever again.
As the bank's capital decreases it ability to borrow decreases.
Hence we are in the mire we are in.
To rebuild a capital base banks can either get new money from shareholders or increase the profit they make from customers from charges and the spread between what they borrow at and what they lend at.
Last edited by chrisbl; 24th Jan 2009 at 19:04.
Agree with all of the above and I'd be delighted to offer you one of my home brewed ciders, within the impregnable compound that is my farm and its armed panic room - full of beans.. Venturing into public to drink will be far far too dangerous in 2010.
Gents I thank all of you for your comments so far and encourage you to continue. The value is that Wannabes learn something that they otherwise wouldn't. This is the reason for building this forum and the reason I cut its grass to this day.
We're probably a bit ahead of our strict remit in covering the banking system and what money is but - heck - it won't hurt them to learn.
WWW
Gents I thank all of you for your comments so far and encourage you to continue. The value is that Wannabes learn something that they otherwise wouldn't. This is the reason for building this forum and the reason I cut its grass to this day.
We're probably a bit ahead of our strict remit in covering the banking system and what money is but - heck - it won't hurt them to learn.
WWW
Join Date: Jun 2008
Location: Just a bit lower than the point where the falling angel meets the rising ape
Posts: 213
Likes: 0
Received 0 Likes
on
0 Posts
Speaking as a wannabe who has learned something he otherwise wouldn't...
Ta. 
It's not all about planes round here, is it?
Regards
JR
It's not all about planes round here, is it?
Regards
JR
Planes? What with Ailerons and stuff? NAH... this an international finance forum mate. If you want people talking about flying aircraft you'd be better off at www.banking-system.co.uk
WWW
WWW
Join Date: May 2003
Location: uk
Posts: 713
Likes: 0
Received 0 Likes
on
0 Posts
Every activity translates into money some time or other so it makes sense to understand they whys and wherefors.
I learnt very early on that to understand a business you need to understand how the money works.
Each business may have its own money flows but they all use the same banks.
So better understand how the system works.
I learnt very early on that to understand a business you need to understand how the money works.
Each business may have its own money flows but they all use the same banks.
So better understand how the system works.