Great article, Bill. Many thanks.
I believe the “Loans create deposits” headline may be easier for several to comprehend it right (eg John Ranlett, “Money and Banking: An Introduction to Analysis and Policy, ” Wiley, 1965) if we reverted to the language used in 1950s and 1960s era money and banking books that seemed to get. 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 don’t watch for receipt of primary deposits before these are generally ready to make loans to credit companies that are worthy.
Needless to say today we have to also add that based upon the character associated with main deposit (demand/current account versus time, transactional versus non transactional, stable versus non-stable), this brand brand brand new liability might (or may well not) attract book demands and/or extra top quality fluid assets (HQLAs required from the Liquidity Coverage Ratio demands from Basel III). And undoubtedly the asset and obligation creation should be in the constraints of both the brand new Basel III leverage ratio and money to risk weighted assets ratio. Consequently, the development of deposits sets in movement a complex and interactive asset-liability-capital administration procedure for every bank. More