{"id":504,"date":"2011-10-17T14:05:24","date_gmt":"2011-10-17T21:05:24","guid":{"rendered":"http:\/\/chasingeden.com\/?p=504"},"modified":"2011-10-17T14:23:23","modified_gmt":"2011-10-17T21:23:23","slug":"why-do-banks-need-our-deposits","status":"publish","type":"post","link":"http:\/\/chasingeden.com\/?p=504","title":{"rendered":"Why do banks need our deposits?"},"content":{"rendered":"\t

How we think it works: <\/strong><\/p>\n\t

We deposit our money at the bank and the bank then lends out that money to others, right?<\/p>\n\t

How it really works<\/strong>:<\/p>\n\t

People do make deposits, yes.\u00a0 Banks also make loans, yes.<\/p>\n\t

What I’m having trouble with is conceptualizing how they are connected.\u00a0 Banks don’t need the deposits to make the loans.<\/strong> Loans are NEW money that didn’t exist before.<\/strong><\/p>\n\t

Banks are not taking your money (from your deposit) and then giving it to the loanee.\u00a0 The bank simply says “Ok, we are giving you a loan,” and then they make a digital keystroke in the loanee’s account, and, presto, there is new money! Magic!<\/p>\n\t

All those millions of bank customers (i.e. all of us) are a hassle.<\/strong> We aren’t very profitable.\u00a0 We require banks to put branches everywhere and have tellers.\u00a0 Mostly just so they can “warehouse” our money, as most of us don’t use fancy services.\u00a0 We just write a few checks and add and subtract money from our account.\u00a0 Those are pretty modest needs.\u00a0 Why not simply stop providing depositor services and still give out loans (which is far more profitable)? <\/strong><\/p>\n\t

An aside here is for people to remind me that our fractional reserve banking system requires banks to keep about 10% of assets on deposit for every dollar they lend out.<\/p>\n\t

This is simply a legislative requirement though (we invented it); so we could easily change it.\u00a0 Also, it reminds us that banks are created legislatively by government; they wouldn’t exist otherwise…so for banks to ask government to stay out of their affairs is disingenuous.\u00a0 The two are inseparable by definition.<\/p>\n\t

However, even with the 10% requirement, why would the 10% need to come from us in the form of our deposits?\u00a0 Why not borrow the 10% from the government or from other banks.\u00a0\u00a0 In essence, when we deposit, the bank is borrowing from us and paying a small interest to our account.<\/p>\n\t

Why not just borrow from elsewhere and pay a small interest to them?\u00a0 Then the banks wouldn’t have to deal with all the small consumer accounts, which is admittedly a lot of work for little reward from a bank profitability perspective.\u00a0 In the end all money (even the money which we eventually deposit) originates from the government.\u00a0 Why not just borrow directly from the government (since that is what is happening indirectly anyway)?<\/p>\n\t

Indeed, why not?<\/p>\n\t

I guess I’ll restate here in summary:<\/p>\n\t

I’m saying consumer banking (where normal people deposit paychecks and maybe write some checks and use an ATM) is not causally related to lending.<\/strong> The two are associated, but you don’t need one to do the other.<\/p>\n\t

Deposits wouldn’t go away entirely if lending and consumer banking were separated.\u00a0 If banks provide loans, they will likely provide the ability to deposit for loanees, since banks generally deposit the amount of the loan you just asked for in an account they just created to be the repository of the loan (alternatively they could give you a suitcase of cash).\u00a0 But the model of normal people depositing a paycheck and such….that just isn’t related to lending that I see.<\/p>\n\t

Am I missing something?<\/p>\n\t

I can think of a few reasons to keep the consumer depositor services: a) for marketing reasons (maintain the relationships for people who might need loans), and b) for public relations reasons (maintain the illusion that banks do something useful for us and so tie up the risk of our money with the risk of their investment arms which cause us to need to bail them out).<\/p>\n\t

In short though, banks must have some other reason for maintaining consumer depository services; isn’t for reasons of profitability.\n<\/p>\n","protected":false},"excerpt":{"rendered":"

How we think it works: We deposit our money at the bank and the bank then lends out that money to others, right? How it really works: People do make deposits, yes.\u00a0 Banks also make loans, yes. What I’m having trouble with is conceptualizing how they are connected.\u00a0 Banks don’t need the deposits to make […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_newsletter_tier_id":0},"categories":[9],"tags":[77,28,41],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p3IMYj-88","jetpack-related-posts":[{"id":214,"url":"http:\/\/chasingeden.com\/?p=214","url_meta":{"origin":504,"position":0},"title":"Why we bailed out the financial sector: Debt is money","author":"kellio","date":"August 21, 2009","format":false,"excerpt":"I pride myself for being a hack, weekend economist.\u00a0 I admit it isn't going to make me rich, but it is interesting. 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