Great article, Bill. Many thanks.
I do believe the “Loans create deposits” headline could be easier for a lot of to comprehend if we reverted to your language used in 1950s and 1960s period cash and banking publications that did actually have it right (eg John Ranlett, “Money and Banking: An Introduction to Analysis and Policy, ” Wiley, 1965). These publications, prior to the corruption by monetarist economists, distinguished between “Derived Deposits” and “Primary Deposits”. Therefore, loans create derived deposits, that are then drawn (or invested) into main deposits. Banking institutions usually do not watch for receipt of main deposits before they’ve been ready to make loans to credit worthy businesses.
Needless to say today we must also add that based upon the character regarding the primary deposit (demand/current account versus time, transactional versus non transactional, stable versus non-stable), this brand new obligation might (or may not) attract reserve needs and/or extra good quality fluid assets (HQLAs required from the Liquidity Coverage Ratio needs from Basel III). And undoubtedly the asset and obligation creation needs to be in the constraints of both the Basel that is new III ratio and money to risk weighted assets ratio. Consequently, the development of build up sets in movement a complex and interactive management that is asset-liability-capital for every single bank.
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