Posted: Apr 01, 2013 1:32 pm
Blackadder wrote:Panderos wrote:Can they not just renew the BoE loan indefinitely?
Yes of course they can. They can roll over the deposit indefinitely but they will only ever earn the overnight interest rate, which is paltry. If a bank knew that it was going to put money on deposit for a longer term, it would choose a different form of deposit.
I'm not quite following. Lets say the bank rings up the Bank of England at 4.30pm (is that when day becomes night in the financial world?) and asks to borrow £10bn. At 9am the next morning they ring up again and say 'roll us over another day'. Meanwhile the lend the money out in loans. Every day they ring the BoE and ask to keep rolling it over. Borrowing at 0.5%, lending out at, say 10%.
Blackadder wrote:If you "create" an account, i.e. a deposit, the money that goes into that deposit has to come from somewhere outside the bank (if it's a genuine deposit). This can be either in paper money or by a transfer from another bank via cheque or electronic settlement. Banks keep accounts between themselves so when a bank transfers money to another bank, The sending bank will debit the receiving bank's account held at the sending bank. These accounts are regularly reconciled to match against all the inter-bank payments and receipts to ensure that the system remains in balance overall.
And for a bank to be able to transfer money to another bank, that money also as to come from somewhere external to the sending bank itself. This can be only one of two places (I simplify again). Either it comes from the account that the sending bank holds with the receiving bank or it comes from an account that the sending bank holds with a third party (e.e. the central bank).
Thank you. I think I actually learnt something here
. But what is to stop two banks from colluding, and increasing the amount of money in the other one's account? I put £10tn in your account, you put £10tn in mine. We then spread that money through our accounts at other banks.Blackadder wrote:Panderos wrote:With regard to the central bank, how do you 'put money in' to an account with a central bank?
As above. The central bank is just another bank for these purposes. You can transfer money to it by asking a third party bank to take money from your account with it and to credit the central bank. Another way to put money in to the central bank is to buy government securities from the central bank. A security is simply an IOU from its issuer, like a bank deposit.
This is a bit confusing. I can transfer money into the central bank from my account with another bank, or I can take that money in my account with another bank and transfer it to the central bank and get government securities in return?
Blackadder wrote:Panderos wrote:I guess what I'm after here is an understanding of how all the different 'accounts' work and how people are prevented from just typing in zeros. Because if you just created a simple bank that wasn't connected to other banks, there'd be absolutely nothing stopping you from doing this.
Correct. But then you would not be able to affect the money supply, either.
What if you were like a super isolated bank, back in 19th century America say. And someone deposits $10,000 in you, and you lend half out it out. Now one guy thinks he has $10,000, and another thinks he has $5,000. Has the money supply not increased? Or even worse if people don't actually use cash, they just order you to transfer money from one of your accounts to another. I can they just type zeros into my own employees accounts if I wanted. When they buy something, the 'money' goes from their account to the seller's (who also uses my bank). Free money for anyone the bank wants, no?