Hot answers tagged

25

I think there are a few separate issues here. First, semantics: if an institute doesn't let you deposit money into your account, I think we'd be hard-pressed to call it a "bank". This really doesn't matter to the fundamental aspect of your question, but I think it's of some use. Because a "bank" has to allow deposits (at least by a naive ...


14

The low interest rate will be in a different currency. If your domestic currency falls in value, the value of the mortgage in terms of the domestic currency goes up. Entities borrowing in a foreign currency and then running into difficulties is a standard features of financial crises over history.


14

What does stop me from taking a loan from a bank in a rich EU-country to build or buy a house in a poor country like Russia, while having EU-level interest rates below 3% instead of the Russian 15%? Other answers have already mentioned the currency risk you would have. Further limitation is that most European banks won't give you a loan at 3% interest for ...


7

This isn't the first time I've seen people claim that this Bank of England article says banks don't need to take deposits, but in fact the article actually says the opposite. In order to make loans banks do need to take deposits or borrow money some other way: By attracting new deposits, the bank can increase its lending without running down its reserves [.....


6

I think this perhaps seems/reads like a theoretical chicken-and-the-egg scenario, but IMO it's not really. The reality is just that fiat currency is like magic, and created out of nothing. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits Central Banks print fiat currency. Pieces of paper ...


6

In simplified terms a bank or shadow bank (non-bank financial intermediary operating a balance sheet similar to a bank balance sheet) holds a mix of cash, marketable securities, and investment portfolio on the asset side of the balance sheet. The bank or FI issues a mix of equity, insured liabilities, and uninsured liabilities on the liabilities and equity ...


5

Banking is confusing, and a lot of explanations apparently make things worse. In this case, ignore whatever you read, and go back to first principles. By definition: balance sheets must balance. Assets have to be matched by liabilities or equity. However, one defining characteristic of banks is that they have a small percentage of their balance sheets as ...


4

Trying to use any single banking indicator like that is probably not incredibly powerful for predicting the trajectory of the entire economy, although the one you've mentioned is indicative of a liquidity crisis, in which Market participants in need of cash find it hard to locate potential trading partners to sell their assets. This may result either due ...


4

I agree with @BrianRomanchuk's +1 answer but I would like to expand on it to give you some more intuition why that holds. According to a simple monetary model of exchange rates, the exchange rate between two currencies (here Euro and Russian Ruble) is given by: $$S = (m - m^*) -\psi( y - y^* ) + \lambda (i - i^*)$$ where $m$ is the log of money supply, $y$...


4

At present, this question resembles three questions. Are people on the internet saying incorrect things about bank money creation? Is money creation by banks fraudulent? Is money creation by banks limited by the fact that deposits are bank liabilities? These are questions that mainly do not fit the desired format of this website, so I will handle them very ...


4

From a legal perspective, deposits are only protected up to the limit of deposit insurance in the jurisdiction. Beyond that, depositors need to recover their claims in bankruptcy court. However, the government might ignore the insurance limit, in the interest of financial stability. This cannot be counted on, of course.


3

Let me explain you in the most simple way how it work behind the scenes... Credit card issuers and payment networks charge cardholders an international transaction fee if the purchase has been made abroad or an overseas bank has to interfere into the transaction process. (it is roughly for about 1 to 3% of the transaction amount, some issuing bank can even ...


3

Here are two ways by which selling mortgage-backed securities (MBS) benefited banks: The MBS is less costly (or equivalently, more valuable) in the hands of the investor than in the hands of the bank. The investor is misinformed/misled about the MBS and overpays for it. Analogy for #1: When you buy car/fire/health/whatever insurance, you transfer the risk ...


3

Very good question. Let's break it down: A bank give a Merry loan of 100,000$ Concretely, the bank records an asset of 100,000 (the loan) and a liability of 100,000$ (the amount recorded in Merry's deposit account). Note that at this point, the liability is what appears on your internet banking statements as 'money' and those liabilities to you from ...


3

Yes, most of the loans were insured - this is called a credit default swap (CDS) that an insurance company insures a bank loan in case of a default (i.e. when a borrower cannot repay, the insurer pays the bank). Banks and insurance companies were making an unprecedented amount of money through this practice. However, when the housing bubble burst, too many ...


3

A checking account is considered a liability because bank essentially owes the amount on the checking account to the owner of the account. If a bank loans someone money that is considered an asset on the banks balance sheet but if that person decides to open checking account at the same bank checking account becomes liability. The loan will still be ...


3

It’s an extremely long-winded way of saying that lending moving from bank lending to bond/money markets. The fact that depositors did not take much direct credit risk is a red herring. I don’t see the financial logic, but yes, the banking sector moved from being lenders to underwriters of securities. Bond and money markets are decentralised: instead of a ...


3

An individual bank needs deposits, other liabilities, and equity to fund loans so it will attract deposits using deposit attracting strategies. Some loans are never taken out as currency. A vendor might be selling an investment or a consumption item to a borrower. In that case the lender creates an asset which is the borrower's debt. If the spending is ...


3

Demand deposits might be cheaper, but they can disappear due to withdrawals. Banks also need stable sources of longer-term funding to match against their illiquid assets. Holding reserves is only of limited economic importance relative to the need to widen funding sources. CD’s are cheap relative to other sources of term funding. It would be very hard to ...


2

When you get your \$200 back, the bank's required reserves go down by \$20 as well, so the bank can take that amount back from its reserves. Operationally, the bank wouldn't go to the central bank and get this, as they probably would have \$200 in cash laying around already.


2

A great starting point is "Fundamentals of Corporate Finance", Ross, Westerfield & Jordan. This book will give you a good overview of key concepts in finance. This book is widely used in introductory courses for non-finance majors, to both teach some fundamental ideas, and give a panoramic view of the field. "Trading" will probably be the topic that ...


2

Widening the acceptable band for the overnight rate would reduce the effectiveness of monetary policy to a certain extent. If the actual market rate is near the middle of the band, then it would be possible for the policy rate band to be moved by 50 basis points, and the actual rate could remain unchanged. This implies a potential need for greater movements ...


2

For time series analysis a classical text is the time series analysis from Hamilton - although nowadays the text is slightly outdated it has an excellent and detailed overview of models that are still in use or serve as basis for more advance models. The time series and panel data econometrics from Pesaran is also excellent - it’s also more contemporary but ...


2

"Vault cash" is the money that a bank will keep on premises (which is usually kept in their vault) to deal with their day-to-day cash needs. The bank must have a certain amount of cash on hand in order to deal with these types of every day transactions. "vault cash" is considered to be part of a bank's reserves, and banks will usually be required to have ...


2

That’s how bankruptcy law works. Every entity that is owed money - including firms that sold products to the bankrupt, workers - wait inline to get paid back according bankruptcy laws. The state cannot make everyone whole, as that would just encourage fraud. E.g., create a shell company, get rich friends to lend it money, take the money out and declare ...


2

If you make a payment of \$X, then: loan balance (bank asset) goes down by \$X, and deposit balance (bank liability) goes down by \$X. I.e., the bank balance sheet shrinks (as do money aggregates that include bank deposits). The bank may have held a loan loss provision against the loan, and so the loan may have been carried on the balance sheet at less ...


2

No because the financial markets do not provide firms with capital they provide them with funds to buy capital which is a difference. You can call those funds financial capital but it’s not capital in economic sense. In common usage in English capital is often used as a synonym for money. For example in Oxford dictionary under the word capital the second ...


2

When sending a payment order to the Fedwire Funds Service, a Fedwire participant authorizes its Federal Reserve Bank to debit its master account for the amount of the transfer. If the payment order is accepted, the Federal Reserve Bank holding the master account of the Fedwire participant that is to receive the transfer will credit the same amount to that ...


2

The question is not restricted to mortgages. You're really asking about generic interest-rate arbitrage---borrow from the country with lower interest rate and lend (in your case, buy a house or become a mortgage lender) in the country with higher interest rate and earn the spread. This would lead to risk-free profit if there is no exchange rate risk---...


2

Different sides of the balance sheet. Capital represents long-dated instruments (infinite lifetime in the case of common equity) issued by a bank that are subordinated in a way to make them comparable to equity. (Can include instruments that are technically liabilities.) The existence of capital means that assets are greater than non-capital liabilities, i....


Only top voted, non community-wiki answers of a minimum length are eligible