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17

In general, there are three kinds of debt: Secured debt, like a mortgage or a repurchase agreement. With a mortgage, for example, the debt is secured by a lien on the home, and if the debtor does not pay, the creditor can seize the home. Unsecured debt, like a credit card or corporate bond. Governments will generally allow creditors to liquidate many of the ...


14

While gross notional exposures are huge, net exposures at the banks are much smaller, on the order of 0.1 percent of gross exposures. Since most financial risk (but perhaps not operational risk) is proportional to net exposures this is a more sensible measure of total derivative risk at the banks. Since net exposures at the 6 banks with the largest ...


13

There is a long standing problem in most discussions of Fractional Reserve Banking (FRB), around the precise definition of money. Cash money (that is M0) is an asset on the banking system balance sheet, while deposit money (the liability) is the money that is created by lending. Ever since the introduction of cheques specifically, and in general the ...


12

I recommend a careful read of the Wikipedia page for Fractional-reserve banking because it seems you are confused about how fractional reserve banking works. Banks only lend out money they have under fractional reserve banking and, in fact, strictly less than they have. Those funds are a mix of deposits, funds from other debt issuance, and bank equity. They ...


10

If you're just trying to understand the volume of electronic transactions generally to an order of magnitude, it's in the quadrillions of dollars per year. According to this document from the US Treasury, SWIFT handles about \$5 trillion per day, or given about 250 business days per year, about \$1.25 quadrillion dollars a year. Similarly, CHIPS handles ...


8

Pro Publica keeps an ongoing list of bailout recipients in the United States. Here is a report on the UK bailouts during the crisis: The Comptroller and Auditor General’s Report on Accounts to the House of Commons: The financial stability interventions The SoFFin Wikipedia page has a list of participating German institutions. FACTBOX - Bank bailouts ...


8

Source:- Bankers cost this country £456.3bn in fraud In the UK, where the government bailed out Royal Bank of Scotland Group Plc (RBS) and Lloyds Banking Group, the total outstanding support explicitly pledged to Britain’s banks stood at 456.3 billion pounds ($730 billion) at the end of March, or 31 percent of GDP, the National Audit Office said in a July ...


6

Limiting the scope to the question of why the US encouraged the proliferation of many banks, one important contributor was the 1927 McFadden act, which placed significant restrictions on interstate banking (rolled back through state laws in the 1980s-90s, and eventually substantially repealed by the Riegle-Neal Interstate Banking and Branching Efficiency Act ...


6

You provide a generally correct impression of history (i.e., there were lots of runs on banks by depositors in the US until federal deposit insurance was established— a good history is provided by Gorton (2012)), and then ask three questions: why isn't deposit insurance provided through the private sector, is it because the free market equilibrium premiums ...


6

This is meant to add to @BKay's answer. Here are some examples that might help to see what's happening when a bank makes a loan. A bank's balance sheet The image below is text taken from Greg Mankiw's textbook Macroeconomics (7th edition, p. 555). This is a simplified version of a typical bank's balance sheet. Notice that reserves, loans, and securities ...


6

What you describe is neither unusual nor pernicious, and occurs more commonly at smaller companies when the company has borrowed significantly from a single bank. Larger companies have direct access to capital markets (in addition to stock, they can issue bonds and commercial paper, which are both forms of debt), and are thus less reliant on their ...


6

A bank selling mortgages does not, by itself, increase the money supply. To see this, work through the balance sheet implications step-by-step: A bank makes a mortgage loan, swapping cash assets on its balance sheet for a mortgage asset. The customer receives cash. At this stage, the money supply has been increased. 2a. A bank sells a mortgage to another ...


5

I found two of two papers discussing this period, the second at length. Throughout the 1970s, the capital position of many banking institutions declined significantly. To address this decline, in December 1981, the bank regulators issued explicit minimum capital standards for banks and bank holding companies. These standards required banks to hold ...


5

The description you're providing of how interest works is based on a couple of fairly common misunderstandings about how the system actually works, so lets clear that up first. Fractional reserve banking and the gold smith banking systems preceding it, are a result of the development of an accounting technology called double entry book keeping in the 13th ...


5

The minimum required capital matters, but in the opposite direction: the more capital you have, the more likely you can challenge big banks. Because the costs of a new bank look like this: (http://www2.deloitte.com/content/dam/Deloitte/pt/Documents/financial-services/dttl-fsi-uk-Banking-Disrupted-2014-06.pdf) You need $15 mn just to keep it alive. Recall ...


5

The answer is simple and it is due to the conduct of business and conditions relating to the early days of exchanges and banks. Then, there was no interest in trading or providing liquidity to companies 24 hours a day and there was no coordination with the other parts of the world. Today, it is more like preserving the tradition, and just look at how NYSE ...


5

From the New York Fed: Shadow banks intermediate credit through a wide range of securitization and secured funding techniques such as asset-backed commercial paper (ABCP), asset-backed securities (ABS), collateralized debt obligations (CDOs) and repurchase agreements (repos). These sorts of things are issued through SIVs, structured investment ...


5

While whomever told you about "shadow banking" in China is correct that in an international context, the term can often refer to informal banking arrangements (the earliest use of the term); however, these days, it is usually used in the sense first coined by Paul McCulley in a speech he delivered ("Teton Reflections") at the 2007 Jackson Hole conference. He ...


5

Because of a change in regulation about how different accounts are to be recorded. That change was stated in the Financial Accounting Statements No. 166. If you look into Notes on Data relating the "Assets and Liabilities of Commercial Banks in the United States - H.8", you find the following statement from April 9, 2010: As of the week ending March 31, ...


5

Under most capitalism-like systems, companies are funded in two ways. One is debt with positive interest, the other is by selling equity to shareholders. If you could effectively prohibit debt, then companies could conceivably adapt by switching to a 100% equity model, in which individuals would shift all of their interest-bearing savings into shares. ...


5

You ask: "what would happen if every country in the world were to make a law that would make it illegal to lend money at a positive rate of interest?" We know what happens, because we've already seen this happen in some places. People reinvent lending for positive interest in some other guise that keeps the word of the law, but breaks the spirit of it. For ...


4

It appears that the OP confuses money with property rights A) It writes "deposits owned by the bank" which is simply wrong, since deposits are liquid assets belonging to the persons that deposited them. The bank leases the funds from them and then sublets them to the debtors. B) Looking also at an OP's comment to another answer, indeed the bank may ...


4

First, there are direct negative effects from inflation, known as the shoe leather cost and menu costs of inflation. These are direct costs which come from price changes: People will carry less cash, need to update their knowledge about prices, firms need to update their prices and wages, and similar. These are usually small, but typically higher given ...


4

Jean Tirole just won the Nobel Prize for his studies in regulation in different markets, including the banking market. Check: Balancing the Banks: Global Lessons from the Financial Crisis and The Prudential Regulation of Banks


4

Historically, banks would take deposits, telling depositors that they could withdraw their deposits upon demand. The bank would then take these deposits, combine them with with the equity of the bank's owners, and extend long term term loans to business, governments, and home owners. Under normal circumstances, this is a nice business model, give 3% interest ...


4

What you describe is the "traditional" bank-run. The 2008 incident you refer to, was called an "electronic bank run", because the problem was not caused by people trying to get tangible paper money in their hands in excess of the actual paper money available to the banks. The problem was that through electronic banking and electronic wire-transfer ...


4

The money is removed when the loan principal is repaid. The actual point in the loan this occurs depends on the loan terms. For a typical compound interest rate loan, this means a small portion of the principal is repaid every month, and a matching liability deposit (money in the customers account) is removed. For an interest only loan, this occurs at the ...


4

When the retail bank in country B multiplies the money supply, it does so by creating an asset (money owed by the borrowers) and a liability (the obligation to honor the loan it gave to the borrowers) on its books, and an asset (money to spend) and a liability (the loan to pay back) on the books of each of the borrowers. Now, if these borrowers are all ...


4

There's additional information in this answer, but in the US, banks pay into the FDIC Deposit Insurance Fund, and regulation and capital requirements are used to stop banks from taking excessive risks with deposits. In the event of a bank failure, depositors below the insured limit are repaid in full, but equity-holders are generally wiped out and other ...


4

The deposits that people have in the banks is a lot more than the money that the banks actually have. This is due to fractional reserve banking. As a consequence, if everybody tries to take out their money, the banks will run out of cash: the banks themselves will be unable to meet their financial obligations, and go bankrupt. When the bank goes bankrupt, ...


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