Banks use your deposits to loan money to fossil-fuel, emissions-heavy firms(wired.com)
wired.com
Banks use your deposits to loan money to fossil-fuel, emissions-heavy firms
https://www.wired.com/story/your-money-is-funding-fossil-fuels-without-you-knowing-it/
10 comments
> they can actually 'borrow' that money for literally a few seconds, and return it right after the checkup
This makes it sound like there's some way here for banks to circumvent reserve requirements by timing overnight loans correctly, but that's not really the case. Reserves are accounted for in the same instant for all banks, so you wouldn't be able to do more than the obvious and, as you say, quite expected activity of banks lending excess reserves to other banks that are short. In other words, the "money multiplier" model no longer describes what's really happening.
But in fact, reserves play a diminishing role in bank regulation as a whole: Many central banks have stopped enforcing them, not least because central banks themselves will usually lend reserves against commercial loans or equities if banks require it.
What matters just as much, and arguably more, are capital adequacy requirements, i.e. a limit on how leveraged banks can be with regards to their equity (i.e. the difference between assets and liabilities): Equity capital serves as a buffer in case of unexpected loan defaults and other losses.
This also puts a cap on a bank's maximum leverage, and unlike reserve requirements, there's no way around them by lending or borrowing reserves.
This makes it sound like there's some way here for banks to circumvent reserve requirements by timing overnight loans correctly, but that's not really the case. Reserves are accounted for in the same instant for all banks, so you wouldn't be able to do more than the obvious and, as you say, quite expected activity of banks lending excess reserves to other banks that are short. In other words, the "money multiplier" model no longer describes what's really happening.
But in fact, reserves play a diminishing role in bank regulation as a whole: Many central banks have stopped enforcing them, not least because central banks themselves will usually lend reserves against commercial loans or equities if banks require it.
What matters just as much, and arguably more, are capital adequacy requirements, i.e. a limit on how leveraged banks can be with regards to their equity (i.e. the difference between assets and liabilities): Equity capital serves as a buffer in case of unexpected loan defaults and other losses.
This also puts a cap on a bank's maximum leverage, and unlike reserve requirements, there's no way around them by lending or borrowing reserves.
There's an attempt here to claim causation here and therefore induce guilt in individuals which is, for lack of better terminiology, daft.
Our carbon emissions aren't really linkable to individual actions in this way aside from fairly direct pollution like burning hundreds of kilograms of plastic in your garden.
Otherwise you end up with absurdities like claiming that, say, the guy who works on the checkout in my local Tesco has a huge carbon footprint because he sells lots of people beef.
It's all linked, the problem is collective.
Our carbon emissions aren't really linkable to individual actions in this way aside from fairly direct pollution like burning hundreds of kilograms of plastic in your garden.
Otherwise you end up with absurdities like claiming that, say, the guy who works on the checkout in my local Tesco has a huge carbon footprint because he sells lots of people beef.
It's all linked, the problem is collective.
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This is not correct. Banks don't use your deposits and loan money to someone else. However, I still think you should not support evil banks for many other reasons.
When banks create a loan, they create new money. They put the loan on the asset side of their balance sheet and create the same amount of liabilities due to the receive of that loan.
When banks create a loan, they create new money. They put the loan on the asset side of their balance sheet and create the same amount of liabilities due to the receive of that loan.
> When banks create a loan, they create new money. They put the loan on the asset side of their balance sheet and create the same amount of liabilities due to the receive of that loan.
What's the difference between a bank and me where they can "create new money"? I'm assuming I cannot do this, because when someone asks me to loan them money I actually have to give them cash to fulfill their request, and if I don't have that cash I cannot "create new money" to give them. I've assumed banks actually have to have cash to give out -- either from being well-capitalized initially and growing that through making good loans over time, and/or by using the cash of depositors.
What's the difference between a bank and me where they can "create new money"? I'm assuming I cannot do this, because when someone asks me to loan them money I actually have to give them cash to fulfill their request, and if I don't have that cash I cannot "create new money" to give them. I've assumed banks actually have to have cash to give out -- either from being well-capitalized initially and growing that through making good loans over time, and/or by using the cash of depositors.
The analogy would be that if your friend Bob asks you for a $1k loan, you could tell him "done, I am loaning you $1k and for now I am keeping it safe for you; just tell me when you need it".
Now you have all the money you had before, and you friend "has" an extra $1k, so you have "created" money.
If Bob then tells you hey, I need the $1k to give it to John, you say no worries, and you go to John and says hey, here is $1k from Bob, and for now I am keeping it safe for you; just tell me when you need it. And so on.
If at some point John actually wants the $1k in cash then you actually give him the money, you cannot create it. Maybe at some point you have just $1k of real cash with you, other people owe you $9k, and yet other people have $10k of "created" money that you are keeping for them. If all of the latter want their money in cash, you are going to be in trouble.
Same with a bank, if a lot of depositors want their money back, the bank has to give it out of its reserves, it cannot "create" it to give it to them, hence the phenomenon of "runs on the bank" (because at any given time, the sum of all depositor balances in a bank is a lot more than the actual reserves) and why we need a federal insurance program to protect depositors.
Now you have all the money you had before, and you friend "has" an extra $1k, so you have "created" money.
If Bob then tells you hey, I need the $1k to give it to John, you say no worries, and you go to John and says hey, here is $1k from Bob, and for now I am keeping it safe for you; just tell me when you need it. And so on.
If at some point John actually wants the $1k in cash then you actually give him the money, you cannot create it. Maybe at some point you have just $1k of real cash with you, other people owe you $9k, and yet other people have $10k of "created" money that you are keeping for them. If all of the latter want their money in cash, you are going to be in trouble.
Same with a bank, if a lot of depositors want their money back, the bank has to give it out of its reserves, it cannot "create" it to give it to them, hence the phenomenon of "runs on the bank" (because at any given time, the sum of all depositor balances in a bank is a lot more than the actual reserves) and why we need a federal insurance program to protect depositors.
In a very broad sense, you can also "create new money": If you are widely known for never letting any of your checks bounce, these checks might become regarded as a kind of money, and people might defer cashing them out of convenience or due to other factors, in a similar way that e.g. Amazon or Starbucks gift cards seem a bit like money as well.
But in the more narrow sense, banks indeed have something quite useful that you, as a non-bank, don't: They have access to the Fed's deposit window, where they can borrow reserves by posting discounted securities as collateral. Often, that's treasuries, but it can also be commercial or even home loans.
Borrowing from the Fed in that way is in fact one of the mechanisms that create new reserves.
But in the more narrow sense, banks indeed have something quite useful that you, as a non-bank, don't: They have access to the Fed's deposit window, where they can borrow reserves by posting discounted securities as collateral. Often, that's treasuries, but it can also be commercial or even home loans.
Borrowing from the Fed in that way is in fact one of the mechanisms that create new reserves.
Then where do our deposits go? If not loans to these companies are they investing in them by buying stock or something? The sum of deposits the bank holds are not available for withdrawl all at once. So where is it?
I think it helps to think how the balance sheet changes. If you deposit money, the bank has higher liabilities, they owe you that money, and higher assets as they actually have the money. So they might buy all sorts of assets with that money. However, it's not that they need that money to make a loan. That was my main point.
> The sum of deposits the bank holds are not available for withdrawl all at once. So where is it?
This only depends on the central bank being able to produce enough cash for all the people. Technically, the commercial bank will ask the central bank to swap their assets for some cash to hand it to the customers. So practically, they might not be able to give cash to everyone, just because the central banks cannot product it that quickly. But other than that there's no problem that many people can withdraw money. If customers come bank with the cash, the commercial bank will take it, give it back to the central bank, and receive their previous assets back.
> The sum of deposits the bank holds are not available for withdrawl all at once. So where is it?
This only depends on the central bank being able to produce enough cash for all the people. Technically, the commercial bank will ask the central bank to swap their assets for some cash to hand it to the customers. So practically, they might not be able to give cash to everyone, just because the central banks cannot product it that quickly. But other than that there's no problem that many people can withdraw money. If customers come bank with the cash, the commercial bank will take it, give it back to the central bank, and receive their previous assets back.
When you go for a loan, and it is approved, the the bank creates a credit line from which you can draw according to terms in the agreement, and it creates an asset representing the future revenue stream of your payments. No 'money' is directly involved.
Once every night a bank's reserves are checked to see wether the bank is in compliance with fractional reserve holdings. Note that while they do need some small % of money at that point, they can actually 'borrow' that money for literally a few seconds, and return it right after the checkup. This is not 'cheating', it is an accepted common practice. That borrowing is not free ofc, so in the long run no bank can stay solvent without having some actual money.