Another Bank in Crisis?
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The FDIC ( Federal Deposit Insurance Corporation ) is going to cover depositor above 250,000 dollars, and they are going to create a special insurance to cover those depositors
I thought I’d check what Professor Richard Werner, the leading academic currency crank (in fact the only one), had to say about the failure of Silicon Valley Bank.
He has claimed to have found evidence that an individual bank on its own can create money ‘out of nothing’:
https://www.sciencedirect.com/science/article/pii/S1057521914001070
In an article on his blog on 16 March he argues that banks should not be allowed to fail because they create most of the money needed to keep the economy going. He seems to think that banks have two quite different and unrelated functions. To act as a safety deposit box, keeping safe money that people don’t want to use for the time being, and to create new money. Apparently, for him, the two are unconnected.
His blog item doesn’t address the question of why, if individual banks can simply create money ‘out of nothing’, they don’t create some, when they are in financial difficulty, to stop them going bankrupt; in fact, why they need depositors at all:
You’d think that, given what has just happened to SVB and Credit Suisse, those like him who argue that a bank doesn’t need depositors (whether individuals, companies, or other financial institutions) to be able to lend money would crawl away and hide in some dark corner. Unfortunately they won’t but will continue to point critics of the effects of the present economic system in the wrong direction.
The Professor had no luck with large European financial institutions, who declined to help with his empirical test on the grounds of security. Why did he not just tell them his theory and ask if this is what they do?
ALB said “ To act as a safety deposit box, keeping safe money that people don’t want to use for the time being, and to create new money. Apparently, for him, the two are unconnected.”
That then also begs the question why are the two always related. If I don’t need to “borrow” money through deposits in order to lend, why would I bother with all of the palaver of offering deposit services (which on the face of it doesn’t really make much money. Why not just do lending on its own and if you can just create money by lending it, why doesn’t everyone.
Actually, banking reformers (to be polite and not call them currency cranks) do propose to legislate to separate these two functions of a bank. There was even a referendum in Switzerland to do this a few years ago (it was voted down). Here’s what they proposed:
“The proposal is that banks should not be able to re-lend money deposited in current accounts. When it receives such a deposit the bank will be required to re-deposit it with the state’s central bank in return for what Sandhu calls ‘State e-money’. All banks would be able to do with this is transfer it between current accounts.
This would certainly restrict bank lending but it wouldn’t (and is not intended to) stop it altogether. As the Swiss banking reformers explained, after the enactment of their reform:‘The banks can only work with money they have from savers, other banks or (if necessary) funds the central bank has lent them, or else money that they own themselves.’
But this is already, now, the case ! Money deposited in a current account is just as much a loan to the bank as is money deposited in a savings account. Banks can, and do, re-lend most of it too, except that, unlike with a savings account, it keeps all the interest. But if money re-lent from a current account is money created from thin air, why is money re-lent from a savings account not?”
If implemented, this would bugger up the financial system and impede banks from carrying out properly their function under capitalism of channelling idle money to those who want money to invest for profit.
We socialists understand better how capitalism works than some of its supporters.
If a bank’s business model was to create money out of thin air and then lend it at interest, this being their income, then banks would be a more profitable line of business than other capitalist businesses. Only they are not. They don’t make more profits per capital invested than do other capitalist enterprises.
In fact, in some respects they are more risky since, by borrowing short-term and lending long-term, they are open to being put in financial difficulty if too many of those they have borrowed money from (their depositors) withdraw it at the same time.
This is why one investor, writing in the Financial Times (25 March), headed his article “Why I will never invest in bank shares”. Other investors, however, are not so timid, treating banks as just another profit-seeking business.
Incidentally, in his article, the author (Terry Smith), gives a breakdown of the assets and liabilities of the NatWest Group. It shows deposits of £470,759 million and loans of only £373,479 million. If banks really could create from thin air money to lend, you’d expect it to be the other way round — loans to be more than deposits. But they’re not.
Currency cranks richly deserve their name.
The IMF has drawn attention to another set of financial intermediaries — the shadow banking system.
Like banks they obtain or borrow money and then lend it out. The only difference is that, unlike banks, they are not allowed to take deposits from individuals or companies.
But nobody claims that they can conjure money out of thin air to lend, even if some of the ways they obtain money are pretty dodgy. Hence the IMF’s concern.
But if they can’t, why can banks? The currency cranks’ claim is full of holes. This is just another one.
This from this morning. No link just saw this…
FDIC took over the First Federal Bank of San Francisco and sold its assets to JP Morgan ( Chase Bank )
https://apnews.com/article/first-republic-bank-silicon-valley-fdic-5ab48702b7136d42f73ac13e0a20955d
Yes, further confirmation that banks don’t create out of thin air the money they lend, but are financial intermediaries borrowing money at one rate of interest and lending money at a higher rate. Generally, borrowing short-term to lend longer term.
Which means that if interest rates go up they could be in trouble. Today’s Times of London describes what happened to First Republic. The US central bank, the Federal Reserve, has been “lifting interest rates rapidly over the past 14 months” with this effect on First Republic:
“Their rise prompted customers to explore alternative options and, as higher rates also knocked the value of its mortgage portfolio, the lender had to stump up to keep depositors. It paid $428 million in interest on deposits during the last three months of 2022, up from $20 million during the same period of 2021. It paid $555 million during the first quarter of this year.”
Who says banks don’t need deposits.
USA Federal Reserve Bank increased interest rate by 0.25%
https://www.cbsnews.com/news/federal-reserve-interest-rate-hike-0-25-percentage-point/
Who says banks don’t need deposits.
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The ones that do not know anything about Banking, and the ones who support conspiracionist theory, and they also do not know how capitalism operates, even more, the school of Banking, Finance, and bank officers indicate that banks need deposits
Pacific Western Bank and probably three more banks collapsed.
As always, there are some Trotskyists groups proposing the nationalization of the banking system, some years ago several trotskyist groups asked for the nationalization of the Budweiser, and they asked workers to defend Sadan Hussein because he was an anti imperialist.
PS: Probably, they do not know that nationalization was a process initiated by the English capitalists during the XVII, it is not a socialist measure
Almost half of the 4,800 banks in the US are nearly insolvent, as they have burned through their capital buffers, The Telegraph reported earlier this week, citing a group of banking experts.
According to Professor Amit Seru, a banking expert at Stanford University, around half of US lenders are underwater.
“Let’s not pretend that this is just about Silicon Valley Bank and First Republic,” he said. “A lot of the US banking system is potentially insolvent.”
Last week, First Republic was seized by US financial regulators and acquired by JPMorgan, the country’s biggest bank. The San Francisco-based lender had previously received a $30-billion rescue shot from a group of Wall Street banks in the form of deposits. The sale of First Republic Bank followed massive deposit runs in March, which caused two regional lenders, Silicon Valley Bank and Signature Bank, to fail within days.
On Thursday, shares of Los Angeles-based PacWest and Arizona’s Western Alliance were suspended after their prices fell dramatically. Earlier in the week, shares of several regional US lenders plunged by at least 15%, triggering investor concerns about the financial health of other mid-sized banks.
Around 2,315 banks across the US are currently sitting on assets worth less than their liabilities, according to a Hoover Institution report by Professor Seru and a group of banking experts, as cited by the media.
The market value of the loan portfolios of these lenders is reportedly $2 trillion lower than the stated book value.
Professor Seru raised questions over the steps taken by US financial watchdogs to tackle the problems faced by crisis-hit mid-sized lenders. The regulators can contain the immediate liquidity crisis by guaranteeing all deposits temporarily, according to Seru, who said, however, that this would not address the greater solvency crisis.
RT 6/5/23
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