My my, I see many of you have no clue. First get to know the definitions.
You are still the only one in step then?
.Money is currency. A Bank is unable to create money or currency. It can only make an IOU. The money is a fixed amount of hard currency or cash flow available to a Bank to support all the IOUs. If the cash demand by depositors exceeds the money supply of the Banks liquidity and cash flow, then there are big problems
Rubish! Everything in the banks accounts is a currency! Money and currency have the same qualities but money has one that currency does not have ..... it is a store of value over time.(Check the dictionary) Hence the only money the banks have is the real money in their clients safety deposit boxes .... in the form of Kruger Rhands, Gold Sovereigns etc.
A Bank creates IOUs through lending. There are many types of lending products. You have high interest non-secured lending, low interest secured lending supported by collateral, equity borrowing, marginal lending through a share portfolio, business and commercial lending as well as short term overdraft borrowing. All types of loans are secured against collateral except non-secured loans which Banks don't particularly like.
Rubbish! The banks issue IOUs only when they borrow your deposits to use as reserves. They do not create bank IOU’s through creating debt (Lending).
Now, when a loan is made, an IOU is credited to someone's account.
Correct but, it is an IOU issued by the borrower paid into to another account not the banks IOU. The bank creates a debt ...... in fact what they do in reality is to grant you a custom OVERDRAUGHT! When they give you an overdraught they don’t lend you anything they allow you to create a debt for yourself, i.e. to spend more than you have in your account. A ‘loan’ is exactly the same concept.
This will appear on a Bank's balance sheet as an asset if the loan is performing. That's because the Bank will make a profit from the interest. Now not all the interest charged is profit. The profit is the total interest - inflation - other costs - base rate. The total profit to the Bank is around 1 to 2% each year. The Banks make money on volume. The margin is actually pretty thin. Now we see the loan as an asset to the Bank. Yes but only as long as the loan exists. The asset has declining value as the borrower is paying it off. Eventually it will disappear. The Bank is left with the profit from the interest over the life of the loan.
The interest is profit earned ..... i.e. income! Just like I could claim my pension isn’t really all pension, as I have to spend some of it to live. The interest is the only profit the bank makes on a loan ..... the capital sum they created as new money, is recovered from the economy and written off the banks books i.e. The sum recovered is destroyed.
This profit on the Bank's bottom line then is entered as an asset on its balance sheet and is returned to share holders through dividend payments.
The profit is part of the banks profit and loss account, not it’s trading account and is deducted as incurred when a loan is repaid. First they deducted the accrued compound interest charged on a daily basis, from the monthly repayment. What remains is written off the loan debt.
Now, as I said, an IOU is not creating money. And the reality is that whilst a loan is a Banking asset whilst it is performing, in actual fact it is a liability to start off with. That is because it is an IOU in someone's account and this IOU is at call in full and even within a 24 hour period.
The ONLY IOU in a bank loan is that the borrower has through his loan contract with the bank. When the borrower spends his credit, he has no other IOU once the IOU he has issued is entered into another account. When it is cleared he has honoured that IOU. He has paid up for whatever he spent the money on.
How can a bank issue an IOU for something it has created. An IOU to whom and for what! An IOU is a liability to repay, the banks have no one to repay the money to ..... THEY CREATED IT FROM NOTHING ..... there IS no bank liability!
Now a Bank would prefer that the IOU maintains its electronic form, but it can also be withdrawn from the Bank's cash supply. A Bank can do it because they are presuming that only 3% of these IOUs will be withdrawn at any given day. Usually, it is way under this.
You’re getting closer! The 3% constitutes ALL the cash in circulation whether it is in the banks cash drawer, in the safe, in the ATM or in your wallet.
Now, a Bank is predominately a secure way for people to deposit money. When a deposit is made, the Bank takes the money and credits your account with an IOU. The money goes towards the Bank's money supply or cash flow. The same money can be given out to another customer who makes a withdrawal from their deposit account. These deposits are liabilities to the Bank because they incur a loss to the Bank through interest payments to the depositor calculated daily.
Where on earth are you getting all this rubbish from? The bank takes the deposits and lodges them as their reserves, they are paid interest on these whilst they are in the Central Bank or are loaned WITHIN the reserves held by the CB of other banks. It is where LIBOR comes from (London Interbank Offer Rate) In it’s place they lodge an IOU in your accounts balance column. The bank does not loan clients deposits, they are reserves and by law cannot be loaned out to borrowers. They are liabilities because they do not belong to the banks, they have a liability to repay these deposits to their clients.
In Cyprus the banks reneged on their IOU just to reduce their liabilities ...... but people were totally unaware of the way the banks worked. The banks defaulted and the people got screwed!!!
.A Bank of course is not alone in being able to create IOUs. Corporations can do it as well. Corporations like Apple, Microsoft, Shell, BP, Tesla, Mercedes, QANTAS, and every other big corporation or multi national can create an IOU and they too appear on its balance sheet as an Account Receivable which is an asset, or an account payable which is a liability. That is not all. Every micro business, such as contractors, trades, small shop merchants can also create IOUs in the same way as a multi national can. A Bank can even offer overdraft lending to a multi national or micro business based on its accounts payable and accounts receivable. These are unsecured short term loans usually only lasting about 30 days. Overdrafts are used by businesses experiencing cash flow issues due to its creditor accounts
You are introducing something that is totally unrelated to the banking subject!
Now, a Bank can't sustain itself if it only takes deposits and can't make IOUs in the form of lending. What kind of Bank would just take your money as a deposit, and mostly through electronic means, pay interest on it and not make money from other functions such as lending or by using your money to buy assets?
The bank needs deposits only as reserves, it does not lend them out. Banks do not issue IOU’s related to debt ..... an IOU is only required when there is a liability to repay ..... the banks has no such liability! Transactions are 99% electronic. Banks do not use ‘your’ money to buy assets, they are not permitted to by law .... the banks create what they need to buy bonds or asset backed securities just like they do for every other loan.
However, they are regulated to take your money. These deposits are also under a Capital Guarantee arrangement up to a certain amount reducing the risk to the depositor to pretty much zero in most cases.
Are you referring to the €100k deposit guarantee?
I repeat, IOUs are NOT money or currency creation. Money supply is fixed or the physical availability of hard cash in the form of currency. The Central Bank however can create money from thin air and it does this to Capitalize the Banks and Government whenever the Government pays Billions of Trillions worth of wages and benefits to public servants and pensioners.
The only IOU’s are those in your account ...... the bank owes YOU the amount stated in your ‘balance’ column. That figure is convertible to currency and is a means of exchange by whatever means, electronic or a wheel barrow full of cash.
Central banks print notes on behalf of the government, they have no mandate to produce currency by electronic means. In the current system government is funded by tax returns. Income tax is predominantly used to repay the loans the government incurs when it sells bonds (IOU’s) through the Central Bank to commercial banks, when tax returns are insufficient to cover the wage bill etc.
It also regulates interest rates to manipulate money supply and maintain adequate supply levels.
Interest rates are at near zero ......... they are intended to stimulate spending and thus the economy. The method of control has failed miserably!
In addition, every utility bill from you electricity account, water bill, gas bill, telecommunications and Internet bills issued by the utilities servicing your household are creating an IOU whenever they send you a bill into your letter box. Now, you can pay these Bills with cash, or send then electronic money through your Bank via an electronic transfer. Once again, it's an IOU to the utility company.
You really are screwed up!!!!!! A utility bill is NOT an IOU, they don’t owe YOU anything it is them sending you a UOMe ..... in accordance with your contract with them ....... just like the borrowers contract with the bank. The utility company owns your IOU as implicit in the T&C’s of your contract with them. Them sending you a bill is a demand for payment .... where does the IOU come into it, except the agreement you have with them to pay your bills as demanded?
It really can't get simpler than that!
No it couldn’t, it’s just a pity it is mainly incorrect and a completely misleading opinion. You are sooooo way off the mark!
