1
$\begingroup$

I am reading Ryan-Collins et al. (2013, Where Does Money Come From? A Guide to the UK Monetary and Banking System). I think I understand how banks create new money whenever they make a loan.

Using their example in 4.2, when a bank loans say £10,000 to Robert, their assets increase by the £10,000 loan and their liabilities also increase by £10,000 in the form of a deposit into Robert's new account. The latter deposit is the new money created by the bank.

However, I do not understand how:

the bank creates new money when it ... pays its staff salaries or bonuses.

Say the bank pays its own staff Jane £5,000. What happens to the bank's balance sheet?

I think a deposit of £5,000 is made into Jane's bank account -- this is the new money created and is recorded under the bank's liabilities. But is there any corresponding change in assets?

$\endgroup$
1
$\begingroup$

If an employee performed work there is a liability called "current liabilities". Paying into the employee's account is just changing one kind of liability into another kind of liability of the same size so total liabilities is unchanged and total assets is unchanged. The new liability is a recorded as a deposit.

Paying the employee with an amount of cash reduces assets and reduces liabilities.

@IñakiViggers is correct, of course, that part of the assets were the result of interest earned and fees charged. My answer addresses only what happens at the instant in time the employee is paid.

$\endgroup$
0
$\begingroup$

is there any corresponding change in assets?

Yes. Broadly speaking, salaries, dividends, and other expenses come from interest and fees the bank charges its customers for loans and other services. Thus, the accrued fees and interest are assets which presumably compensate the salary liabilities.

In the event that expenses such as salaries outweigh the bank's inflows (that is, the change in assets that comes in the form of interest/fees/etc.), the bank would offset those liabilities via deductions from its capital. Keep in mind that a bank's (or any entity's) balance sheet needs to preserve the equation $$Assets=Liabilities+Capital$$

$\endgroup$
  • $\begingroup$ So in my Jane example, does the bank's balance sheet increase or decrease by £5,000? And what would it be recorded as? $\endgroup$ – user1180576 Feb 22 at 2:08
  • $\begingroup$ @user1180576 Salaries would be recorded as wages payable or something similar. It is hard to tell for how much the balance sheet will increase or decrease, as that depends on how the bank offsets its liability (I expanded the answer to encompass the scenario where a change of assets is non-existent or insufficient for preserving balance). $\endgroup$ – Iñaki Viggers Feb 22 at 18:39

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.