HSBC - falling apart?
Discussion
NickCQ said:
ATM said:
Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account
Granting the loan creates an asset and an offsetting liability for the bank, yes (a liability that they pay interest on). However - if you want to actually do anything with the proceeds of that loan (ie spend it) then the bank’s liability reduces and it must commensurately reduce assets to keep its balance sheet in balance.
DanL said:
Isn’t that article just saying that the majority of money isn’t in the form of physical notes, etc? I.e. if everyone wanted to withdraw their money at the same time, there simply isn’t enough cash in circulation to cover this?
I work in banking software - we don’t have a magical “create money” feature in our lending module. Money moves from one account to another, and has to balance.
What’s been described sounds like QE to me, and I was under the impression that only the BoE did that?
I’d have thought that the opening paragraph was important too: “Money is more than banknotes and coins. If you have a bank account, you can use what’s in it to buy things, typically with a debit card. Because you can buy things with your bank account, we think of this as money even though it’s not cash.”
NoI work in banking software - we don’t have a magical “create money” feature in our lending module. Money moves from one account to another, and has to balance.
What’s been described sounds like QE to me, and I was under the impression that only the BoE did that?
I’d have thought that the opening paragraph was important too: “Money is more than banknotes and coins. If you have a bank account, you can use what’s in it to buy things, typically with a debit card. Because you can buy things with your bank account, we think of this as money even though it’s not cash.”
Again someone can't accept the facts and think it must mean something else which is more believable.
Think about these credit card deals where you transfer your balance to a new card and pay a 3% fee.
Let's say you have a limit of 12 grand and are allowed to do a balance transfer of 10 grand for simple maths.
Up until the moment you lend that 10 grand it did not exist. Then magically it does exist.
You're thinking this guy is crazy.
Read the BoE website again. It says this. Up until you lend that 100 it did not exist.
I've tried explaining this to people before I found that very helpful quote on the BoE website and people look at me like I am crazy.
The banks just make it up.
It sounds crazy and it is.
Bankers will talk about complicated rubbish. Don't get distracted. Remember the facts.
Back to your credit card example.
So they send you this magic 10 grand and it pays off your other credit card. They charge you 3%. So the credit card balance is 10300 after the initial transfer. The 3% is real money which has not magically come into existence.
If you pay off the 10 grand then they just wipe it out. It is deleted. It ceases to exist. If you pay off the whole 10300 immediately and owe no interest the 10 grand dissappears and the 300 remains. They keep that.
Ever wandered how these credit card companies can afford to do these 0% interest deals. Now you know. They don't have to go find the money or pay someone else to borrow it. They just magically create it from nothing and get 3% immediately for the privilege.
Now it is perfectly feasible that the 10 grand you pay from one credit card company to another was also magically made from nothing. So the credit card company receiving your 10k transfer will probably just delete this money as it was made up by them. So one bank has made up 10k to give to another bank which had also originally made up that 10k and it can now delete it.
So 10 grand might get created but it is also getting deleted in this credit card example.
The money isn’t created out of nowhere.
The credit card company borrows it from investors, bond holders, banks etc, and then lends it to you.
When you repay it, they repay their own debt with the proceeds.
They make a profit on the difference between the interest rate they charge and pay, and on the transaction fees they receive. The latter is partly why they can afford to do zero deals.
loafer123 said:
The money isn’t created out of nowhere.
The credit card company borrows it from investors, bond holders, banks etc, and then lends it to you.
When you repay it, they repay their own debt with the proceeds.
They make a profit on the difference between the interest rate they charge and pay, and on the transaction fees they receive. The latter is partly why they can afford to do zero deals.
WrongThe credit card company borrows it from investors, bond holders, banks etc, and then lends it to you.
When you repay it, they repay their own debt with the proceeds.
They make a profit on the difference between the interest rate they charge and pay, and on the transaction fees they receive. The latter is partly why they can afford to do zero deals.
BoE website -
Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.
ATM said:
loafer123 said:
The money isn’t created out of nowhere.
The credit card company borrows it from investors, bond holders, banks etc, and then lends it to you.
When you repay it, they repay their own debt with the proceeds.
They make a profit on the difference between the interest rate they charge and pay, and on the transaction fees they receive. The latter is partly why they can afford to do zero deals.
WrongThe credit card company borrows it from investors, bond holders, banks etc, and then lends it to you.
When you repay it, they repay their own debt with the proceeds.
They make a profit on the difference between the interest rate they charge and pay, and on the transaction fees they receive. The latter is partly why they can afford to do zero deals.
BoE website -
Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.
greygoose said:
ATM said:
loafer123 said:
The money isn’t created out of nowhere.
The credit card company borrows it from investors, bond holders, banks etc, and then lends it to you.
When you repay it, they repay their own debt with the proceeds.
They make a profit on the difference between the interest rate they charge and pay, and on the transaction fees they receive. The latter is partly why they can afford to do zero deals.
WrongThe credit card company borrows it from investors, bond holders, banks etc, and then lends it to you.
When you repay it, they repay their own debt with the proceeds.
They make a profit on the difference between the interest rate they charge and pay, and on the transaction fees they receive. The latter is partly why they can afford to do zero deals.
BoE website -
Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.
Dont forget - this is fundamental - they can only create magic money if they are lending it to someone. That was what the credit crunch was all about. They got greedy trying to lend more and more money to the point where the people borrowing it had absolutely no way of paying it back. So they started to take the pee basically and we all got f'ed as a result.
ATM said:
Wrong. BoE website -
Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.
What if you want to take the money out of your account or spend it? The bank has to come up with the case, either by turning other assets into cash (i.e. selling its assets) or borrowing money.Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.
This is why I made the earlier point about the difference between the behaviour and incentives of any one bank vs the system-wide impact on the money supply.
I think I understand your perspective, but I don’t think you’re correct. I think you’re viewing just one half of the transaction.
Let’s say the bank creates this money - it ends up on one side of a ledger. It has to be balanced by another ledger entry. The bank’s position overnight has to be balanced, and they may need to borrow money in turn to ensure that happens, sometimes at quite punitive rates if someone’s screwed up and they’re desperate...
If you were correct then LIBOR (once “the most important number in the world” before the rate fixing scandal) wouldn’t need to exist, and now it’s been discredited it wouldn’t need to be replaced by SONIA, SOFR, etc.
This is, frankly, all a little beyond me - I work in the industry, but I have business analysts for this stuff so I don’t understand the details as well as perhaps I should.
I understand enough that intuitively, looking at the way banking works, what you say doesn’t seem to tally with my experience. There are a load of people who do work in banks and in finance on PH though, and hopefully they’ll be able to join the dots and confirm what you or I are saying, ideally in a clearer way than I’ve managed! 
Without wishing to appear rude or confrontational, what do you do? In a world of internet experts, it would be good to know if you’re speaking from industry experience.
Let’s say the bank creates this money - it ends up on one side of a ledger. It has to be balanced by another ledger entry. The bank’s position overnight has to be balanced, and they may need to borrow money in turn to ensure that happens, sometimes at quite punitive rates if someone’s screwed up and they’re desperate...
If you were correct then LIBOR (once “the most important number in the world” before the rate fixing scandal) wouldn’t need to exist, and now it’s been discredited it wouldn’t need to be replaced by SONIA, SOFR, etc.
This is, frankly, all a little beyond me - I work in the industry, but I have business analysts for this stuff so I don’t understand the details as well as perhaps I should.
I understand enough that intuitively, looking at the way banking works, what you say doesn’t seem to tally with my experience. There are a load of people who do work in banks and in finance on PH though, and hopefully they’ll be able to join the dots and confirm what you or I are saying, ideally in a clearer way than I’ve managed! Without wishing to appear rude or confrontational, what do you do? In a world of internet experts, it would be good to know if you’re speaking from industry experience.
loafer123 said:
NickCQ said:
Granting the loan creates an asset and an offsetting liability for the bank, yes (a liability that they pay interest on).
However - if you want to actually do anything with the proceeds of that loan (ie spend it) then the bank’s liability reduces and it must commensurately reduce assets to keep its balance sheet in balance.
To be fair, I am pretty clued up on this stuff, and even I don’t understand that description!However - if you want to actually do anything with the proceeds of that loan (ie spend it) then the bank’s liability reduces and it must commensurately reduce assets to keep its balance sheet in balance.
HSBC makes a £100 loan and pays the proceeds into the customer's account at HSBC.
This is reflected in HSBC's accounts as follows:
assets +£50 (the loan)
liabilities +£50 (the deposit account balance)
Note (for advanced readers): there is also an impact on HSBC's CET1 ratio as RWAs have gone up (due to the loan), leverage ratio (as total assets have gone up with no change in capital) as well as LCR and NSFR impacts.
Customer then withdraws the money in cash at an ATM to spend on something
HSBC can satisfy this withdrawal in two ways (1) borrow £50 from a third party or (2) sell an asset it owns for £50
Option (1)
cash +£50 (the proceeds of the new borrow)
liabilities +£50 (the new borrow)
cash -£50 (cash out at the ATM)
liabilities -£50 (reducing the original customer's deposit balance)
Option (2)
bonds -£50 (sell assets to produce cash)
cash +£50 (proceeds of selling assets)
cash -£50 (cash out at the ATM)
liabilities -£50 (reducing the original customer's deposit balance)
NickCQ said:
Sort of akin to the undrawn limit on a credit card - you can grant as much limit as you like and you only need to provide cash when the customer actually uses it.
Although banks do have to hold reserves against undrawn credit, which then can’t be used elsewhere and which has a cost.ATM said:
Because they are run by greedy idiots who get paid an absolute fortune maybe. I don't know.
You are tying yourself in knots now.If they were run by greedy b
ds they’d never let them go bust. The banks could simply lent to their senior staff, on a 1,000 year term with interest payable at maturity.
Kent Border Kenny said:
ATM said:
Because they are run by greedy idiots who get paid an absolute fortune maybe. I don't know.
You are tying yourself in knots now.If they were run by greedy b
ds they’d never let them go bust. The banks could simply lent to their senior staff, on a 1,000 year term with interest payable at maturity.Until you get past the idea of banks making up money you can't possibly truly understand what the credit crunch was all about. They started making up too much money too quickly. That is it.
ATM said:
I dont know why they go bust. Is that better?
Until you get past the idea of banks making up money you can't possibly truly understand what the credit crunch was all about. They started making up too much money too quickly. That is it.
Have you ever thought of running your own, ethical bank, that doesn’t create money our of thin air? Or maybe just a little?Until you get past the idea of banks making up money you can't possibly truly understand what the credit crunch was all about. They started making up too much money too quickly. That is it.
You could be on to a winner!
AlexC1981 said:
Evoluzione said:
We paid the broker. I was encouraged to write after reading a couple of other posts earlier in the thread (don't know if you read them). The whole thing has been very stressful, it's been going on since March and we still don't know if we've secured a home. I hope you have more success!
Thanks, fingers crossed mine doesn't take long as it will cost me nearly £12K in stamp duty if it goes past 31st March. I wonder if I should have gone with someone with a higher rate, but able to process a bit quicker.It is stressful, the morning after I did the application I woke up to find I had broken out with spots
I hope you never have to go through a fraction of what we've been through and we've paid supposed proffessionals to do the work!
matrignano said:
ATM said:
I dont know why they go bust. Is that better?
Until you get past the idea of banks making up money you can't possibly truly understand what the credit crunch was all about. They started making up too much money too quickly. That is it.
Have you ever thought of running your own, ethical bank, that doesn’t create money our of thin air? Or maybe just a little?Until you get past the idea of banks making up money you can't possibly truly understand what the credit crunch was all about. They started making up too much money too quickly. That is it.
You could be on to a winner!
ATM said:
Kent Border Kenny said:
ATM said:
Because they are run by greedy idiots who get paid an absolute fortune maybe. I don't know.
You are tying yourself in knots now.If they were run by greedy b
ds they’d never let them go bust. The banks could simply lent to their senior staff, on a 1,000 year term with interest payable at maturity.Until you get past the idea of banks making up money you can't possibly truly understand what the credit crunch was all about. They started making up too much money too quickly. That is it.
Instead of 10% of their balance sheets being shareholder capital it fell to low single digits.
If you have capital of £10m and 10% capital you can have a lending balance sheet of £100m.
At 3%, that is £333m.
At that level of leverage, it only took a few loans to go bad for banks to be unable to pay their own debts, and this created a spiral of default and collapse.
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