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Author Topic: What reserve ratio do UK commercial banks require to lend/create money?  (Read 4055 times)
protokol
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April 30, 2014, 08:34:31 PM
 #1

So we all know that commercial banks create new money out of thin air, in the form of loans and mortgages.

My question is what fraction of loans must they hold in reserves/deposit, and who enforces these regulations?

I thought the figure (in the UK) was between 1% and 10%, but I've read in a few places that there is no technical limit, and that commercial banks can basically lend out as much as they like, no matter how little they hold in reserve. Obviously they run the risk of becoming insolvent if they do this recklessly.

According to Wikipedia:

Quote
Canada, the UK, New Zealand, Australia and Sweden have no reserve requirements.

This does not mean that banks can - even in theory - create money without limit. On the contrary: banks are constrained by capital requirements, which are arguably more important than reserve requirements even in countries that have reserve requirements.

I'm trying to get my head round the details of "capital requirements" right now, the definitions are a bit complicated. I hope someone can enlighten me!  Smiley

Guess I'll make that my sig, all the cool kids have one...
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April 30, 2014, 08:54:16 PM
 #2

So we all know that commercial banks create new money out of thin air, in the form of loans and mortgages.

My question is what fraction of loans must they hold in reserves/deposit, and who enforces these regulations?

I thought the figure (in the UK) was between 1% and 10%, but I've read in a few places that there is no technical limit, and that commercial banks can basically lend out as much as they like, no matter how little they hold in reserve. Obviously they run the risk of becoming insolvent if they do this recklessly.

According to Wikipedia:

Quote
Canada, the UK, New Zealand, Australia and Sweden have no reserve requirements.

This does not mean that banks can - even in theory - create money without limit. On the contrary: banks are constrained by capital requirements, which are arguably more important than reserve requirements even in countries that have reserve requirements.

I'm trying to get my head round the details of "capital requirements" right now, the definitions are a bit complicated. I hope someone can enlighten me!  Smiley
Some articles that may be of interest:
http://en.wikipedia.org/wiki/Reserve_requirement
http://uk.reuters.com/article/2014/03/25/uk-lloyds-banking-capital-idUKBREA2O0J420140325

Also this one:
http://www.bankofengland.co.uk/publications/Pages/news/2013/097.aspx

So it seems to be around 4.5-8% and is being regulated up to ?11%. Some of the definitions seem to vary, and this seems to be open to a bit of stats fudging.
protokol
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April 30, 2014, 09:05:07 PM
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Thanks, I've previously read the Wikipedia link but not that article, interesting.

I think I'm getting the idea of capital requirement, been reading about the Basel Rules in detail. So it's basically similar to reserve requirement, but weighted differently for different types of loans and assets, right?

Guess I'll make that my sig, all the cool kids have one...
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May 01, 2014, 12:54:51 AM
 #4


Thanks, I've previously read the Wikipedia link but not that article, interesting.

I think I'm getting the idea of capital requirement, been reading about the Basel Rules in detail. So it's basically similar to reserve requirement, but weighted differently for different types of loans and assets, right?

I believe there aren't any technical limits.  The limit is the credit worthy borrowers avail.

Banks don't just give out because they can.  They just learned their lesson from sub prime mortgage fiasco
TrailingComet
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May 02, 2014, 06:30:50 AM
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Think it averages out at round 10-15%
Diff ratios for diff kinds of capital

protokol
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May 08, 2014, 08:18:16 PM
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Think it averages out at round 10-15%
Diff ratios for diff kinds of capital

Yes, these different ratios for different capital is what "Basel III" rules state I think. The problem in 2008 was that a bank needed ~equal capital to lend a business loan, whereas they only needed ~10% for a mortgage loan. So obviously they lended far more mortgages than Business loans, leading to the crisis.

So Basel III changes this setup, giving more lenient leverage to business loans, supposedly to aid economic growth.

However, is it true that commercial banks can simply borrow  money form the central bank, if their capital deposits dwindle (ie by selling pensions/mortgages back to the central bank? (I read this somewhere, can't find the source). if this is true it could very easily implode IMO.

Guess I'll make that my sig, all the cool kids have one...
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May 09, 2014, 04:27:59 AM
 #7

UK banks were covertly supported by the Bank of England 2008 onwards.  It was never made a big deal or outlined especially because of how people react when they know the bank has run out of money.  FED no doubt did the same, injected liquidity or whatever you would label it as.   Asset prices 'recovered' or inflated and problem solved, Im not sure how much they still rely on funding but the majority is repaid already.

The ratio banks lent on was far below 10% and RBS I think would have been 3% maybe, they lent me money right in the middle of the worst price falls.   They were so lucky it was an election year or they might have been cut loose. 
 Lloyds went to the other extreme now and is far past 10% I think, the housing prices helps them greatly where as RBS has more exotic trades that will never recover a bit like the tech boom.
I'd say the answer is 10% at least but they can still lend at 1% in theory, obviously not a good idea to do so as we saw

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May 09, 2014, 05:52:15 AM
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Thanks, I've previously read the Wikipedia link but not that article, interesting.

I think I'm getting the idea of capital requirement, been reading about the Basel Rules in detail. So it's basically similar to reserve requirement, but weighted differently for different types of loans and assets, right?

I believe there aren't any technical limits.  The limit is the credit worthy borrowers avail.

Banks don't just give out because they can.  They just learned their lesson from sub prime mortgage fiasco
The very nature of the fiat ponzi scheme requires that the banks continually issue new debt.
In the US, the mortgage bubble is being blown up a second time.
http://www.zerohedge.com/news/2014-02-14/crisis-circle-complete-wells-fargo-returns-subprime
Or just browse the titles here;
http://www.zerohedge.com/category/tags/housing-market

The only way to deal with an unfree world is to become so absolutely free that your very existence is an act of rebellion. – Albert Camus
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May 10, 2014, 03:47:02 AM
 #9

i china it's around 13% i guess.

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maurya78
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May 10, 2014, 05:47:46 AM
 #10

Right now, I would expet that the ratio averages out at around 10-12%

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