Uk

Atilla

Legendary member
19,909 3,160
hi atilla,

would agree with that one myself.

I dont know if there is any regulation in terms of reserves, etc for liquidity purposes. however, the Basel committee has regulations capitalisiation that imply (or better) induce banks to keep cash

it has been some time since i have been involved with that, so my answers will be 10 years old. but here you go:

premise is 8% capital on risky assets.
a) cash, short term government bonds, and sovereign bonds (investment grade) have 0% risk weighting (i.e no need to tie capital to it)
b) loans: for every pound the bank lends, at the most 92% can come from deposits, and at least 8% from the banks capital.

so as a result, you have a regulation that induces banks to optimise a portfolio in terms of profitability given a capitalisation constraint. therefore there still exists the equivalent of a "reserve requirement". the question is what % of assets that will be.

hope it helps

j

Thanks Jacinto, it does. It's good to know some of the nitty gritty stuff.:)
 

BugBear

Junior member
16 1
so as a result, you have a regulation that induces banks to optimise a portfolio in terms of profitability given a capitalisation constraint. therefore there still exists the equivalent of a "reserve requirement". the question is what % of assets that will be.
Developments in the form of CDO's have blown most of this out of the water, banks only need to maintain minimal equity in these vechicles, the rest can be returned as collateral for further loans.

I think the new Basel rules have lifted what little restrictions remain, banks can essentially loan whatever amount that can be supported (or appear to be) by the client, which is exactly what we're seeing from private equity to mortgages at x6 multipules.
 
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jacinto

Senior member
2,374 101
Developments in the form of CDO's have blown most of this out of the water, banks only need to maintain minimal equity in these vechicles, the rest can be returned as collateral for further loans.

I think the new Basel rules have lifted what little restrictions remain, banks can essentially loan whatever amount that can be supported (or appear to be) by the client, which is exactly what we're seeing from private equity to mortgages at x6 multipules.

fair enough, bugbear, i havent been involved or interested in that stuff for some time now. good to know

thanks

j
 

BugBear

Junior member
16 1
fair enough, bugbear, i havent been involved or interested in that stuff for some time now. good to know

thanks

j
I think the new Basel rules are only just coming in, ironically they may co-incide with a nice credit crunch :eek:
 

fibonelli

Experienced member
1,338 288
i think you are confusing the Multiplier effect of High Powered Money (i.e. new money printed by a central bank) with a deposit of an individual.

j

Jacinto,

I think you are getting lost in the detail.

The simple fact is that banks create new money. Nothing more, nothing less.

They also create new money which is a substantial multiple of a deposit. Again, that is all you need to know.

If you read the pdf, examples are given to illustrate these two points.

Fibonelli
 

jacinto

Senior member
2,374 101
Jacinto,

I think you are getting lost in the detail.

The simple fact is that banks create new money. Nothing more, nothing less.

They also create new money which is a substantial multiple of a deposit. Again, that is all you need to know.

If you read the pdf, examples are given to illustrate these two points.

Fibonelli

i must say i respectully disagree with your observation. that pdf is from 1971. Even Milton Friedman would today tell you its a bit old ;) .

The way economists are taught in universities of how money is created is probably outdated, and with it what is around on the internet for non economists to read

IF you want to get to the nitty gritty of money creation, I suggest you find out the definitions onf M1, M2, M3, etc etc etc.....

all the best

j

Edit: small hint on what to research: look for monetary aggregates, and you could start by searching OECD, FMI. ah, and also see BIS good luck

Edit 2: I used to be a central banker ;)

Edit 3: here is 2 links
http://www.oecd.org
http://www.bis.org/index.htm
 
Last edited:

Atilla

Legendary member
19,909 3,160
i must say i respectully disagree with your observation. that pdf is from 1971. Even Milton Friedman would today tell you its a bit old ;) .

The way economists are taught in universities of how money is created is probably outdated, and with it what is around on the internet for non economists to read

IF you want to get to the nitty gritty of money creation, I suggest you find out the definitions onf M1, M2, M3, etc etc etc.....

all the best

j

Edit: small hint on what to research: look for monetary aggregates, and you could start by searching OECD, FMI. ah, and also see BIS good luck

Edit 2: I used to be a central banker ;)

Edit 3: here is 2 links
http://www.oecd.org
http://www.bis.org/index.htm

Ah hold on there... Wouldn't that imply you have a conflict of interest?

Or

As you did say 'used to be' why the change?



As for me I'm sort of in the middle of the road really. We do need banks and lending.

I think it's too simplistic to say they create money and that's all they do and that's bad.

They also finance business, ideas and inventions and speed along the purchase of what you can't have tomorrow, today. Why wait years to save up? :cheesy:

Can't deny excess liquidity at the mo - I blame the governments not the banks.

As for the independance of the Fed and BoE and Deutchbank or now the great ECB well that is a bonus. Do we really want politicians and governments to run the banks. I don't think so. :rolleyes:
 

jacinto

Senior member
2,374 101
Ah hold on there... Wouldn't that imply you have a conflict of interest?

Or

As you did say 'used to be' why the change?



As for me I'm sort of in the middle of the road really. We do need banks and lending.

I think it's too simplistic to say they create money and that's all they do and that's bad.

They also finance business, ideas and inventions and speed along the purchase of what you can't have tomorrow, today. Why wait years to save up? :cheesy:

Can't deny excess liquidity at the mo - I blame the governments not the banks.

As for the independance of the Fed and BoE and Deutchbank or now the great ECB well that is a bonus. Do we really want politicians and governments to run the banks. I don't think so. :rolleyes:

ah, finally, an intelligent comment....

used to be......


atilla, we were trained to learn M1, M2, M3, even M4, but we were never trained to learn how other aggregates would arise with financial innovation and technology. that has changed.

It has changed to the extent that central bankers decided to stop targetting exactly that, changes in the Ms, and started to target an inflation rate ;) , and enhanced supervision of risk (if they have any).

the politicians running the banks. no way, keep the "monetary engineers" :cheesy:

j
 
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jacinto

Senior member
2,374 101
Developments in the form of CDO's have blown most of this out of the water, banks only need to maintain minimal equity in these vechicles, the rest can be returned as collateral for further loans.

I think the new Basel rules have lifted what little restrictions remain, banks can essentially loan whatever amount that can be supported (or appear to be) by the client, which is exactly what we're seeing from private equity to mortgages at x6 multipules.

and this, if true (not doubting you bugbear) simply puts the "if there is any "risk supervision out there" into place.

rather interesting that the banks have "hedged" (so to speak) default risk....errr, wasnt that what banking was about....:eek:

that is really spooky, if default risk is in the real sector.

j
 

BugBear

Junior member
16 1
rather interesting that the banks have "hedged" (so to speak) default risk....errr, wasnt that what banking was about....:eek:
One presumes a huge number of hedge funds are the counterparties to great deal of these credit default swaps, which is great until something goes wrong, then you have something that makes LTCM appear like a storm in a tea cup.

This is the moral hazard of modern central banking, everything is too big to fail and has implicit backing.
 

2468steve

Experienced member
1,076 39
ah, finally, an intelligent comment....





It has changed to the extent that central bankers decided to stop targetting exactly that, changes in the Ms, and started to target an inflation rate ;) , and enhanced supervision of risk (if they have any).



j

Jacinto,
Given your central bank bakground,out of curiosity what would be your definition of inflation...?? If I read your above post correctly it suggests that central bankers are of the opinion that the M's and inflation are different.....

cheers
 

jacinto

Senior member
2,374 101
Jacinto,
Given your central bank bakground,out of curiosity what would be your definition of inflation...?? If I read your above post correctly it suggests that central bankers are of the opinion that the M's and inflation are different.....

cheers

hi,

well thats a tricky question on your end there.

the general definition would be "increases in the general price level". which i know is rather vague, but to the point. it means that it depends how you measure a price level.

it is typically measured by a basket of goods and services to construct a price index. changes of the price index would be the obvious direct definition of inflation for that matter. you can then either add or subtract components as you wish for policy matters (central bankers also sometimes fudge numbers :p )

one measure of inflation i like to observe is the implicit price deflactor. and this is the price change derived from GDP increases in nominal levels.

confusing, yes, i know, but thats what economists learned to do at school.
"if you can beat the mass, confuse them" :cheesy:

j
 

2468steve

Experienced member
1,076 39
hi,

well thats a tricky question on your end there.

the general definition would be "increases in the general price level". which i know is rather vague, but to the point. it means that it depends how you measure a price level.

it is typically measured by a basket of goods and services to construct a price index. changes of the price index would be the obvious direct definition of inflation for that matter. you can then either add or subtract components as you wish for policy matters (central bankers also sometimes fudge numbers :p )

one measure of inflation i like to observe is the implicit price deflactor. and this is the price change derived from GDP increases in nominal levels.

confusing, yes, i know, but thats what economists learned to do at school.
"if you can beat the mass, confuse them" :cheesy:

j

J,
Thanks for your reply...interesting answer.Also interesting to know young economists are taught this rising price principle at school.This possibly explains why there is perhaps a misunderstanding of inflation from those with the power to control it.

I'd maintain that inflation is by definition a rise in M3,and not general prices....an increase in money supply leads to more paper in circulation,which in turn chases a finite quantity of goods/assets , more paper,same amount of goods = rising prices

cheers
 

jacinto

Senior member
2,374 101
J,
Thanks for your reply...interesting answer.Also interesting to know young economists are taught this rising price principle at school.This possibly explains why there is perhaps a misunderstanding of inflation from those with the power to control it.

I'd maintain that inflation is by definition a rise in M3,and not general prices....an increase in money supply leads to more paper in circulation,which in turn chases a finite quantity of goods/assets , more paper,same amount of goods = rising prices

cheers

sure, no worries. ive actually been away from this kind of stuff for some time. It kind of affects my trading, cause i start having views of the economy, and blurs my mind of where currencies are going.

yeah, increases in the Ms can lead to that conclusion, and under particular circumstances it is the correct conclusion. anyway, dont want to keep on going about it really.

if interested in good readable economic research, then google the next names

Brad Delong (berkley university)
PAul Krugman (Princeton, i think)

and if interested in harder stuff to read, then google

Dornbusch+Overshooting

nice research linking currency movements to inflation, etc. etc. It is a bit old, but still very well regarded.

j
 

2468steve

Experienced member
1,076 39
sure, no worries. ive actually been away from this kind of stuff for some time. It kind of affects my trading, cause i start having views of the economy, and blurs my mind of where currencies are going.

yeah, increases in the Ms can lead to that conclusion, and under particular circumstances it is the correct conclusion. anyway, dont want to keep on going about it really.

if interested in good readable economic research, then google the next names

Brad Delong (berkley university)
PAul Krugman (Princeton, i think)

and if interested in harder stuff to read, then google

Dornbusch+Overshooting

nice research linking currency movements to inflation, etc. etc. It is a bit old, but still very well regarded.

j

J,
thanks,I'll have a google...

Ask 5 economists for their views and you'll get 8 different opinions :LOL:

Enjoy you're trading day.....

Steve
 
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