Questions tagged [banking]

Use for questions about banks, their operations, and their role in the broader economic and financial system.

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15
votes
5answers
2k views

Implications of abolishing Fractional Reserve Banking on mortgages and interest rates

Suppose for a moment that someone with legislative power decides to abolish Fractional Reserve Banking and passes a law that forces banks to only lend the money they own, that is M0. What would be the ...
8
votes
2answers
1k views

What is the necessity of the FDIC in the US banking system?

A bank's basic function is to "borrow short and lend long". In other words, it borrows money from depositors over the short term, promising to repay it on demand, while it lends most of that money out ...
2
votes
1answer
354 views

How is monetary policy fair in the current economy? [closed]

I've just read Money Creation in the Modern Economy, an article published by the Bank of England. This article brings about a lot of questions in my mind. This article talks about money being created ...
2
votes
3answers
153 views

How important are capital requirements for controlling broad money supply?

Interestingly, the Bank of England (BoE) is one of the few central banks that does not have reserve requirements. Canada, the UK, New Zealand, Australia, Sweden and Hong Kong have no reserve ...
6
votes
3answers
204 views

What is Islamic Banking?

What is "Islamic banking," and how is it similar to and different from banking as it occurs in the U.S.? I have heard Shariah Law prohibits usury, the taking of interest on loans. How do Muslim ...
4
votes
1answer
184 views

Federal Reserve capital injections

What were the specific conditions that the Federal Reserve attached to the capital injections forced upon the major Wall St. banks during the Great Recession? How and why do they differ from normally ...
3
votes
3answers
309 views

Sanity of lending out made-up money

Background I've done some research to get an understanding into the issue I want to ask about. Regrettably, I found out general descriptions of the mechanism and/or evidently biased explanations, ...
16
votes
4answers
4k views

Why is fractional reserve banking allowed?

I learned about banks' fractional reserves and that revolted me. How is that not considered to be fraud? The idea doesn't seem too sophisticated, on the contrary, it sounds very simple: the bank ...
4
votes
3answers
384 views

Is money mostly created (out of nothing) by banks making loans?

In the Bank of England's Quarterly Bulletin, 2014 Q1, McLeay, Radia, & Thomas write a pair of articles titled: "Money in the modern economy: an introduction" and "Money creation in ...
7
votes
1answer
20k views

How much money is wire transferred every year worldwide?

How much money is wire transferred every year worldwide? Estimates are fine.
10
votes
1answer
224 views

How does a bank convert one currency to another?

Say for example I sell ZAR and buy USD. What happens behind the scenes so that the local ZAR bank is able to deposit USD into my account? Does the bank require some sort of USD cash reserve? How do ...
8
votes
3answers
14k views

Why hasn't massive derivatives exposures at banks already led to disaster?

I recently heard that Deutsche Bank had $72trillion of "derivatives exposure", which is many times greater then the entire German GDP. Now as I understand it, derivatives are essentially just bets ...
6
votes
2answers
140 views

Who regulates the balancing of the books for commercial banks? How? Is it public information?

I've just read Money Creation in the Modern Economy, an article published by the Bank of England. This article brings about a lot of questions in my mind. This article talks about money being created ...
3
votes
3answers
253 views

What Happened in 2008?

Some say "housing crash" but I suspect the existing global banking system imploded. Am I off-base, or ...? In my experience, CME S&P futures, for example, require a performance bond of something ...
4
votes
5answers
622 views

Could massive derivatives exposures at banks lead to disaster?

A while back I posted this question about the possible risks of banks having massive derivatives exposures. The most upvoted answer (by BKay) said that there was little risk because banks mainly hold ...
3
votes
3answers
115 views

How does a bank create new money when it pays its own staff?

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 ...
3
votes
1answer
279 views

How does the fractional reserve banking system work?

I would like to understand better exactly how this works. I have heard a lot recently (particularly since the 2007-08 crash and Occupy movement) about money creation in particular (usually with a very ...
3
votes
4answers
329 views

What is the justification for it being a problem if loans are not paid back?

As far as I could understand, the loan system applied by banks which is based on a fractional reserve system works as follows: Assumptions: The bank has initially 1000$. The fractional reserve is ...
2
votes
1answer
394 views

If banks create money by lending it out, how are they taking any risk?

When I lend money to someone and they don't pay it back, I lose my money. I can only lend out money that I own (or borrow). I understand that when a bank lends money, that money is created the ...
0
votes
1answer
382 views

Isn't the liquidity trap about real interest rates?

Here is a so-called thought experiment. Suppose the inflation rate is negative, the nominal interest rate slightly negative, and the real interest rate positive (call it $r$). I think people would ...
-1
votes
3answers
90 views

Does Shadow Banking (i.e. non-Commercial Banking) produce transaction-useful money?

In shadow banking amongst primary dealers & large institutions...I understand repurchase agreements function similar to deposit accounts (Gorton, et al). Additionally, I understand how traditional ...