27 votes

Why do banks take deposits if they do not need them to make loans?

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 ...
MichaelS's user avatar
  • 395
13 votes
Accepted

Why is money in circulation a liability of the central bank?

Balance sheets always balance, so assets equal liabilities. Imagine a commercial bank goes to the central bank and wants cash. The central bank provides the cash, but asks for some of the commercial ...
M3RS's user avatar
  • 1,087
11 votes
Accepted

Why hasn't Quantitative Easing surged inflation, or caused hyperinflation?

High-powered money is another term for the monetary base or MB. MB represents all money created by the government. However, that is not all the only source of money. Banks are allowed to create ...
user2662680's user avatar
  • 1,090
9 votes
Accepted

Why are the financial intermediation theory of banking or fractional reserve theory of banking still accepted despite evidence to the contrary?

There are several reason for it. Please note the reasons are not necessarily listed in order of importance, the last point is actually most relevant answer to your question. The 'Evidence' You Cite ...
1muflon1's user avatar
  • 55.5k
8 votes

Why do banks take deposits if they do not need them to make loans?

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 ...
Ross Ridge's user avatar
7 votes

Why should I get a bond with negative interest instead of having a bank deposit account either zero interest or positive interest

It makes little sense to me either, but here are some possible reasons for buying a bond with negative interest rates rather than depositing the same amount in a bank: The deposit-taking bank may go ...
Henry's user avatar
  • 4,755
6 votes
Accepted

How can the HKMA peg the Hong Kong dollar at 7.8 HKD/USD for so long?

To maintain the currency peg, the Hong Kong Monetary Authority (HKMA) has to buy HKD and sell USD when the currency comes under depreciation pressure and sell HKD and buy USD when the currency comes ...
M3RS's user avatar
  • 1,087
6 votes
Accepted

Would capitalism without banks work?

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 ...
410 gone's user avatar
  • 8,143
6 votes

Are quantitative easing and helicopter cash really different tactics? And how does QE relate to Modern Monetary Theory?

What is QE: QE is simply an asset purchase by central bank. As explained by Fed St. Louis QE is defined as: large-scale asset purchases—in the hundreds of billions of dollars range—of, for example, ...
1muflon1's user avatar
  • 55.5k
6 votes

Why do banks take deposits if they do not need them to make loans?

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 ...
unknownprotocol's user avatar
6 votes
Accepted

Did Capitalism and Adam Smith Support a Central Bank?

Does Adam Smith ... support a Central Bank/Federal Reserve? Adam Smith was firmly in favor of central banking (although not necessarily in the same way as understood today). In Chapter 3 Book 4 of ...
1muflon1's user avatar
  • 55.5k
6 votes
Accepted

Do governments have to pay interest on government debt held by the central bank?

Yes, the government has to pay interest on debt even if it is held by the central bank. That is true at least for major modern central banks. For example, from a press release from the US Federal ...
BrsG's user avatar
  • 1,622
5 votes

Why should I get a bond with negative interest instead of having a bank deposit account either zero interest or positive interest

@Henry gives a good answer with lots of interesting reasons. However, there are lots macro-model setting where the demand for risk free assets is positive, even when the interest on savings is ...
BKay's user avatar
  • 16.3k
5 votes

How is the interest on fractional reserve money creation paid?

The key thing to note is that the interest paid does not simply accumulate at the bank. Nobody runs a business in order to just make a big pile of money to keep in a safe. The banks spend the money ...
Mick's user avatar
  • 1,046
5 votes

Would capitalism without banks work?

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 ...
Dan's user avatar
  • 1,346
5 votes

World GDP increase

Am I correct to assume that the increase in GDP is exclusively caused by inflation? No. World GDP increases when the world produces more in one year than it did the year before. Inflation means (...
BB King's user avatar
  • 6,138
5 votes

Why don't central banks just donate money to their poor citizens, rather than QE?

Most federal banks don't have the legal authority to do this, but the notion is definitely sometimes discussed, often under the informal name "helicoptering money". Former Fed Chairman Ben Bernanke ...
tparker's user avatar
  • 770
5 votes
Accepted

How does the Federal Reserve unwind the asset purchasing scheme announced in response to the 2020 Coronavirus Pandemic?

The unwind depends upon what the central bank did. If the central bank did a repurchase agreement (“repo”) or lent against assets for a fixed time, the agreement automatically unwinds at the term of ...
Brian Romanchuk's user avatar
5 votes

Why do banks take deposits if they do not need them to make loans?

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. ...
Brian Romanchuk's user avatar
5 votes
Accepted

Is it true that the Federal Reserve is not federal and has no reserves?

Is it true that the Federal Reserve is not Federal and has no reserves? Both claims are blatantly false. On Reserves Fed literally has power to create new reserves for other banks or for its own ...
1muflon1's user avatar
  • 55.5k
5 votes

Do governments have to pay interest on government debt held by the central bank?

This may vary from country to country, but in most countries government pays interest de jure but not de facto as all major central banks send their profits (including profits made from interest ...
1muflon1's user avatar
  • 55.5k
5 votes

How leveraged are banks in the United States?

I'm trying to figure out how leveraged banks currently are. The leverage in the banking sector actually decreased. It is true that the reserve requirement were suspended, but at the same time Basel ...
1muflon1's user avatar
  • 55.5k
4 votes
Accepted

How much leverage has the Federal Reserve taken on today (Jan 2016)?

Page 4 of this document has the balance sheet as of November 2015: http://www.federalreserve.gov/monetarypolicy/files/quarterly_balance_sheet_developments_report_201511.pdf Their assets are 4489 ...
Dole's user avatar
  • 456
4 votes
Accepted

Why currency purchasing power is linked to confidence in central banks

TL;DR Version: The trust that money has value gives it its value. If money can be exchanged for gold, then this makes people trust that it will have value. If this is not the case (and it is not, ...
BB King's user avatar
  • 6,138
4 votes
Accepted

The independence of Central Banks

The independence of the central bank means that the bank is independent of the government. A mandate of the central bank is to ensure price stability. However any excess cash the bank prints is the ...
Giskard's user avatar
  • 29.2k
4 votes

How do central banks create money to pay interest on reserves

The payment of interest is straightforward. The central bank is a bank, and pays interests on deposits in exactly the same way as any other bank. If the central bank wants to pay $1 in interest to a ...
Brian Romanchuk's user avatar
4 votes

How does national debt work?

Your understanding is wrong. Nations accrue debt by selling bonds. They pay interest on those bonds to the bond-holders.
410 gone's user avatar
  • 8,143
4 votes
Accepted

Why is national debt bad if the central bank can keep buying bonds?

Yes. The central bank (say the Fed in U.S.) can purchase bonds, but notice: The Fed is not going purchase t-bonds and t-bills directly from the Treasury. It will only purchase or sell bonds in the ...
T. G.'s user avatar
  • 316
4 votes

Why is national debt bad if the central bank can keep buying bonds?

This site is aimed to give non-opinion based answers; this question is worded in a way that leads to opinions (“bad”). I will do my best to give a straight answer. I would argue that it is safe to ...
Brian Romanchuk's user avatar
4 votes

Is it possible to repay the world debt? If not, why do we care?

So there are a couple of things you want to consider: 1st: It is not true that if some country gains 1% some other country must have lost that 1% of economic growth. The economy is not a zero-sum ...
Regio's user avatar
  • 4,188

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