To answer a question I am often asked, and which was asked in response to relevant infographics on banks, I offer this:
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Another good explanation for why banks seek deposits. Thank you.
The usual question is why do they bother if they just create the money for the deposit in the first place.
Prof Richard Werner also summed it up neatly, saying banks seek deposits from customers because it’s the cheapest form of borrowing for a bank, ie they will pay out no interest on a current account. This is cheaper than the other alternatives, i.e borrowing from another bank ( on the interbank markets)or raising new shares that require dividend payments, or worst case scenario, borrowing from the central bank, which comes with penalty charges.
Most banks now have enough reserves on hand(thanks to all that QE) to cover any daily shortfall, so the problem encountered during the 2008 financial crash is largely redundant.
If all banks lend at more or less the same rate, everything tends to work fine. Problems arise when one or two banks get too aggressive on lending,step out of line and lose too many reserves as money gets paid out to other banks.Then not finding enough reserves to replace them. The case of Northern Rock being a good example.
The answer is – as you imply, – depositors are a cheap form of capital – in fact, cheaper than anyone else – and deposits are capital to a bank – money they can lose if they go bust.
I know some resist that claim, so I did not put it in the infographic, but deposits are credits on the balance sheet, and so is capital. They have different regulatory roles, but look at the big picture, and they are now much the same; except deposits are cheaper.
I was wondering if/when you might tackle this…. it is a complicated/difficult concept.
An infographic can never capture the complexity of “liquidity” but I think you have avoided “the long grass” well – ie. simplification without saying anything that is untrue.
Thank you.
Thank you
Another that went through umpteen versions.
‘Just shows you where the power actually lies – in ‘our’ money paid into banks every month or week.
No wonder the banking sector lies so much. It is actually more like a public service at the end of the day.
Alright, I’ve decided now to send a weekly “Newsletter” to every major german party about your Infographics (would feel weird to send it to english parties as a german but there are surely people that could do that 🙂 ).
Even to the right-wingers.
Well, honestly said, most likely a waste of time (especially concerning the right-wingers), but at least I’ll have tried something and your graphics really need to be seen / known by much more people.
Thanks
A tiny nit-pick. Image 2 could perhaps give the impression that the person in green borrows £5,000 from the bank, and is then magically able to give £5,000 each to the other three people? Just my reading of it I suppose. Perhaps him depositing money with a garage in return for buying a car might be better? I think borrowing money to buy something is more common than just sharing it out with other people as the pic currently infers?
The implication is they end up with the deposits – as they do