Positive Money are trumpeting a claim that a couple of articles in the latest issue of the Bank of England's Quarterly Bulletin back up their theory, in particular the second, which argues:
Quote:
banks do not act simply as intermediaries, lending out deposits that savers place with them
They seem to have ignored the word "simply" as well as this passage in the article which explains that banks must have or get the funds to back up their lending, even if these don't all come from deposits that savers place with them:
Quote:
Figure 1 showed how, for the aggregate banking sector, loans are initially created with matching deposits. But that does not mean that any given individual bank can freely lend and create money without limit. That is because banks have to be able to lend profitably in a competitive market, and ensure that they adequately manage the risks associated with making loans. Banks receive interest payments on their assets, such as loans, but they also generally have to pay interest on their liabilities, such as savings accounts. A bank’s business model relies on receiving a higher interest rate on the loans (or other assets) than the rate it pays out on its deposits (or other liabilities). (…) The commercial bank uses the difference, or spread, between the expected return on their assets and liabilities to cover its operating costs and to make profits In order to make extra loans, an individual bank will typically have to lower its loan rates relative to its competitors to induce households and companies to borrow more. And once it has made the loan it may well ‘lose’ the deposits it has created to those competing banks. Both of these factors affect the profitability of making a loan for an individual bank and influence how much borrowing takes place. (…) Banks therefore try to attract or retain additional liabilities to accompany their new loans. In practice other banks would also be making new loans and creating new deposits, so one way they can do this is to try and attract some of those newly created deposits. In a competitive banking sector, that may involve increasing the rate they offer to households on their savings accounts. By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending.(emphasis added)
This is a good enough description of how modern banks work, though it is not clear that "attract" is the right word to describe how the "other liabilities" are acquired since these will be what the bank itself borrows, "liabilities" being what the bank owes others (as opposed to what others owe them, or "assets"). So, from this angle, banks are "intermediaries" between those who lend them money and those they lend money to, even if it is not as "simple" as that.
