Salient to Investors:

Martin Sandbu writes:

  • The view that banks first accept deposits from savers before lending them to investors is wrong. The reverse is true – banks create deposits and credit them to their borrowers.
  • Because of this, Cullen Roche argues that the quantity of central bank reserves does not typically constrain the amount of lending done by the banks: instead the constraints are expected profitability and equity requirements. The corollary is that QE does not necessarily increase lending, though it does make non-bank financing cheaper.
  • Frances Coppola says the interest rate on banks’ reserves influences interbank rates and so, indirectly, lending rates to the public, even when the system is flush with reserves, as now.
  • The BoE predicts pro-cyclical rather than counter-cyclical bank leverage, and a significant role for quantity rationing of credit rather than price rationing during downturns.
  • Unlike banks, shadow banks do need to attract pre-existing savings before they can channel them into investments, so do not have the problem of systemic risk in creating and destroying money.

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