Talk:Fractional-reserve banking

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Example of money multiplier effect confusing[edit]

The chart does not correspond to the numbers on the graph since the graph stops at K bank loans, which makes the entire example confusing. The chart should be altered to note somewhere that eventually the total deposit size reaches 500 in theory, rather than stopping at 457

reference to Menger[edit]

Hello, I'm new to this. The reference to Menger (reference 5) does not appear to be appropriate. I have searched Menger's book and could not find any reference in it to the history of fractional reserve banking. Is there a better reference to use? — Preceding unsigned comment added by Andersmith (talkcontribs) 04:11, 26 August 2015 (UTC)

External links modified[edit]

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Inclusion of 'Inside Money' and 'Outside Money' terminology[edit]

Article introduces the concept that '...bank deposits are usually considered money in their own right'. In monetary economic literature this is referred to as 'Inside Money'. The article also mentions 'monetary base', which is also known as 'Outside Money'.

Under the section 'Money Creation Process', Central Bank Money is defined. I suggest that the alternative name 'Outside Money' is appended. Under the section 'Money Creation Process', Commercial Bank Money is defined, and an alternative name, 'Checkbook Money' is also included. I suggest that the more formal alternative name 'Inside Money' is appended.

This terminology is consistent with the text "Modelling Monetary Economics" by B. Champ, S. Freeman, J. Haslag. ISBN13:978-0521177009 This text is a prescribed reading for 300 level Monetary Economics course, and confirmation of the alternative terminology may help those struggling with the concept of money creation.

Jarryd Johnson (talk) 23:49, 1 November 2015 (UTC)

3RR Noticeboard[edit]

See [1]

SPECIFICO talk 16:50, 14 November 2015 (UTC)


Fringe assertions[edit]

This page has been under constant attack over the last few years from people holding the fringe idea that banks, on receiving a deposit, immediately issue credit that are a multiple (1/rr) of the deposits received. The rallying cry of these fringe activists is 'banks do not lend out deposits'. As far as I can tell, there are no reliable sources banking up the assertion that banks immediately issue credit equal to a multiple of newly deposited funds. Standard texts back the idea that banks loan out only a fraction of newly deposited funds -- since banks have prudential standards, and funds lent out by a bank are usually withdrawn from the bank. I would like to test consensus for the standard 'multiple steps' story of deposit multiplication, shown by the graph in the section Example of deposit multiplication. Are we all (or mostly) of like mind on this issue? Yours in fringe frustration, LK (talk) 13:44, 15 November 2015 (UTC)

I agree that the idea you described those people as holding -- that when a bank receives a customer deposit, the bank somehow immediately issues credits in amounts equal to a multiple of the amount of the deposit -- would be a fringe view, and would be frivolous.
As an aside, or general comment: Of course, in one narrow, technical sense, banks do not lend "deposits" (when we use the word "deposit" to mean the liability owed by the bank). You can't "lend" an obligation that you owe.
And, even when we use the word "deposit" to mean the paper currency or coin deposited by a customer (or the customer's act of making that deposit), the bank only rarely "lends" those items to someone else. Instead, most bank loan proceeds are in the form of bank checks, credits to a customer deposit account, etc., etc. Certainly, some actual paper currency and coin is disbursed by the bank each day, but borrowers generally do not receive loan proceeds by walking out of the bank lobby with bags of currency.
Usually, when currency is being disbursed by the bank, the currency is being disbursed to a customer, to reduce the amount of his deposit account balance, and not as loan proceeds. Famspear (talk) 16:52, 17 November 2015 (UTC)
I wouldn't say that 'banks lend out deposits', but I would say that if a bank is short of funding, when funds are deposited by customers, the bank will be able to lend out more (but less than the amount of funds deposited). LK (talk) 02:05, 18 November 2015 (UTC)

Consensus on money creation[edit]

Over the past several years, there has been a slow but constant influx of what I would call 'cranks' (pardon my french) who argue that this page gets money creation all wrong (WouNur being just the last in line). I think people here are clear about how money creation works in the real world. I just want to establish consensus about how money creation works, so that we can refer to this consensus for future debates, and to help guide us in the editing of this page.

Money creation in short:

  • The central bank has a target interest rate that it pursues to control inflation. It freely buys and sells government bonds in the financial markets (and thus expands or contracts reserve money) to keep market interest rates at the target rate.
  • The money supply may change if the central bank raises (or lowers) the target rate, thus raising (lowering) the inter-bank market interest rate. This encourages banks to contract (expand) lending, which contracts (expands) the money supply.
  • The money supply may also change if the business environment changes, causing banks to banks to expand or contract lending, thus expanding or contracting the money supply.
  • Thus, there can be both 'supply shocks' as well as 'demand shocks' affecting the monetary system.

I believe this is the standard textbook version, but am open to critiques and changes. Comments anyone? LK (talk) 03:29, 26 November 2015 (UTC)

That is sort of a holistic view of money creation. I think the more reductionist view of money creation is that it basically done in one of two ways, either through an increase in the money base or through the money multiplier. The one which I think is most relevant the topic of fractional reserve banking, and the one primarily covered in this article, is money creation through the money multiplier. You can of course have a long discussion of how the money multiplier can be affected in all sorts of ways by regulators, the central bank and market forces, but I am not sure such a holistic view of the matter is really needed here. I am fine with the more specific view presented in the article.TheFreeloader (talk) 18:42, 26 November 2015 (UTC)
There are two issues with the more mechanical money multiplier view. First, given that the central bank does OMO to keep to an interest rate target, an improvement in business sentiment (and thus more bank lending) can 'pull' reserves into the system. And second, the money multiplier doesn't hold when interest rates are near zero (liquidity trap) as bank just accumulate excess reserves. However, I see your point. These complication shouldn't be discussed in length in this article. Instead, they should be elaborated upon in the money creation article. How about this, we point cranks who argue that we get money creation all wrong to the money creation article and ask them to improve that instead? LK (talk) 01:25, 27 November 2015 (UTC)
It seems you are arguing against yourself. Your "two issues" serve to show that the vanilla money multiplier idea is simply junk. So why promote it? There are many ultra senior central bankers that say we shouldn't. Reissgo (talk) 10:50, 27 November 2015 (UTC)
Ressigo, would it satisfy you if we keep the exact mechanism by which a central bank expands money supply vague (but not incorrect) on this page, and point to the money creation page with more detail there? I know that you dislike the presentation of the money multiplier table, but such a table is in all the textbooks when they explain the broad money implications of fractional reserve banking, and so it should be here. We can add a short note somewhere in this article that explains that central banks do not generally 'inject money into the system', rather they lower their interest rate targets, which causes them to purchase government bonds, which injects money into the system. LK (talk) 15:18, 2 December 2015 (UTC)
I agree, that sounds like a good plan. This article's section on money creation should just be a summary of the technical parts which pertain to fractional-reserve banking of the money creation article. The broader view of the matter is only really relevant to the money creation article.TheFreeloader (talk) 17:36, 27 November 2015 (UTC)
I don't support this idea. Firstly, the money creation page is dreadful. Secondly, the money multiplier table has no relevance to the real world. Reissgo (talk) 11:34, 3 December 2015 (UTC)

──────────────────────────────────────────────────────────────────────────────────────────────────── LK, I suggest you ignore the fringe views and make whatever edits you feel would clarify the presentation of the mainstream view. You are the editor who is perhaps most familiar with current presentations of this subject matter in textbooks and other widely acknowledged RS. SPECIFICO talk 14:18, 3 December 2015 (UTC)

According to Google Schollar, the Bank of England paper Money creation in the modern economy has had 114 citations already. Can you really call it fringe? Reissgo (talk) 17:57, 3 December 2015 (UTC)
Affirmatory. Please familiarize yourself with WP policy in this matter. SPECIFICO talk 18:07, 3 December 2015 (UTC)
Please enlighten me with some example sources, on the monetary system, that you consider more authoritative/reliable than the Bank of England Quarterly Bulletin. Reissgo (talk) 14:21, 5 December 2015 (UTC)

Full reserve banking initiative in the Netherlands[edit]

Recently an initiative for full reserve banking in the Netherlands (depositobank.nl) failed because it would have had to take part in the national deposit insurance scheme. The Dutch national bank refused to grant an exemption because it said existing legislation did not allow for it. This led to parliamentary questions. If we can find good English language sources, this might be useful to work into the article. Martijn Meijering (talk) 22:07, 26 December 2015 (UTC)

How long can a section be left with citations needed flag?[edit]

I noticed that the section "example of deposit multiplication" had a flag saying "This section needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (May 2014)". Wikipedia is supposed to contain verifiable information - so I thought it was about time the section was deleted. SPECIFICO then restored the section.

What should happen here? For how long can an inadequately cited section remain on wikipedia?

For the record, I think the section is misleading, and the BoE amongst many others has said as much. Reissgo (talk) 15:04, 30 March 2016 (UTC)

I just did a search of the article as currently written, and the phrase "example of deposit multiplication" does not appear in the article. What is the exact wording of the heading for the specific section you are referring to? Famspear (talk) 17:33, 31 March 2016 (UTC)
PS: Also, I just did another search, and I found no flag anywhere saying "This section needs additional citations for verification..." etc. Famspear (talk) 17:34, 31 March 2016 (UTC)
PS: There is a section on the money multiplier concept, but the text in that section says (in part):
A mechanism used to calculate the maximum size of the money supply from any given quantity of base money and a given reserve ratio, is known as the "money multiplier". Rather than directly limiting the money supply however......
That is a description of a mathematical concept, not a description of an actual physical process of creating deposits by making loans, etc. But, I'm not sure if that's the text you're referring to, anyway. Famspear (talk) 17:40, 31 March 2016 (UTC)
Famspear, your efforts here are appreciated but in this case WP:DENY is best. Recent edits should be reverted to the last stable version. SPECIFICO talk 18:33, 31 March 2016 (UTC)
Famspear, your search did not find anything because I had removed the section again with an edit at 09:27, March 31, 2016 - see history. Reissgo (talk) 18:48, 31 March 2016 (UTC)