André Kühnlenz has written an interesting post “Willkommen im Klub, liebes Euroland, … willkommen bei uns Drogendealern!” on his blog WeitwinkelSubjektiv. My understanding is, that Andre wants to explain the mystery that is national savings. Unfortunately he starts off with some confused statements about another mystery, which is household savings. Because this confusion is widespread (also among bankers, who should know better), I’ll try a brief answer in English. André writes (my translation):
Who, for example, brings his savings to the bank, gives the bank a loan. The bank uses the deposit to finance investment loans, installment loans for home purchases or major purchases or the bank invests our savings in securities (sort of credit too).
André’s claim in the first sentence is: if you deposit money in your savings account, you give the bank a loan. I’m aware that in the fiasco that is the Eurozone after the
pillage rescue of Cyprus the notion, that a deposit is a loan to a bank is the latest fad. But is this true? In a very limited and narrow sense we might say so. The deposit is an asset for you and a liability for the bank. But that’s it. First we must consider how the majority of deposits come into existence. Bank loans create bank deposits.
If André walks into his bank A applying for a 10k consumer credit and bank A approves his credit application a deposit of 10k is created in André’s checking account. Would André consider his new deposit of 10k as a loan to bank A? Certainly no. Now because André isn’t some funny guy who takes out a loan just for having a new deposit he’ll use the 10k for some purchase or investment. And because he’s a cool guy he might consider buying my shiny Harley second hand.
By doing so André transfers his 10k to my checking account at bank B. Shall I consider my new 10k deposit as a loan to bank B? Again certainly no. Not only is my balance sheet unchanged. I’ve traded one asset (my Harley) for another asset (my 10k deposit). But I’ve also provided my bank B not only with a new liability but also with the corresponding asset, the 10k CB reserves which are transferred from bank A to B. By doing so I made my bank B 100% whole.
Which brings me to the next claim of André: that banks use our deposits to make loans or buy securities. Again in a very limited and narrow sense we might say so. But again that’s it. First we must consider how banks make loans. Banks create loans out of thin air, expanding the asset and liability side of their balance sheets simultaneously, constrained by the amount of capital they hold and the capital requirements enforced by the regulatory regime.
When André shows up at the loan desk of his bank A, the loan officer will assess the creditworthiness of André and depending on the risk appetite of the bank will decide YES or NO. But the loan officer will not call via his red telephone the backoffice whether the bank has enough deposits to extend a loan to André.The bank only takes care ex post once André wires me the 10k of its proper reserve position to clear the wire transfer between bank A and B. Bank lending isn’t reserve constrained.
Finally what really disturbes me about this new fad, that deposits are loans, is: it makes me responsible for business transactions which aren’t my business at all. This is like me and André trading a hammer for a screw driver and later on André trading his hammer for a lasso. He can’t then come back to me asking: Hey, I want my screw driver back because with the lasso I can’t hammer a nail.