By what legal authority can the banks demand repayment?

Mike63

I have a point for discussion and will set out a scenario. My understanding is that the banks create money. For example, I get a mortgage from Bank A of #100k. They ensure they have about #2k to back it up, then magic up #100k to give to me whilst simultaneously creating #98k of new money and #100k of debt due to them via a few keystrokes. I pay them say #200k of interest depending upon interest rates over 25 years. Let's assume an interest only mortgage as it's easier to visualise. At the end of that period they also demand #100k of capital.

Here is my question: why is the #98k capital any more theirs than mine, or belonging to anybody? They magic'd it out of thin air, put figures in my account, which I then authorised to transfer to the account of the house vendor. Based upon only #2k of capital, the bank then claimed #200k of interest on money that was mostly not real (what a business model!) and then has the cheek to demand return of #100k of capital that they never had in the first place (again, what a business model!).

Although the bank has #100k of debt on its books, it is not real debt as it would be for you or I because if you, for example, loaned your brother #1k then #1k of your assets are now converted from actual money to a promise and your balance sheet stays the same, whereas when the bank created your mortgage they only locked 2% of real assets and the 98% becomes additional assets that they will extract from you. They don't do anything to earn these extra assets, in fact quite the reverse, you have to pay them interest for this prvilage they have.


My idle speculation wonders under about the legal authority, and here magic money stands for the #98k:
* to create magic money
* to demand interest on magic money
* to demand the repayment of magic money

Let me put it another way: why do I owe the bank any more than the #2k they put down in the first place?

Mike

ILW

Because you signed a contract saying how much you would repay. What the bank paid is of no consequence.

Thrugelmir

Mike63 wrote: »

Let me put it another way: why do I owe the bank any more than the #2k they put down in the first place?

The bank holds your property as security. So in the event of default. Sells the property (an asset on the banks balance sheet) to clear the debt you owe.

Interest charged is how the bank covers its operational costs, pays corporate tax, pays shareholders a dividend and retains profit that increases it's reserves.

opinions4u

Strange.

If you look at a bank's balance sheet you see liabilities on one side (customer deposits) and assets on the other (loans).

They balance out.

Where do you get this strange notion that they magic money up and only have £2k in deposits for each £100k in loans?

For example, I get a mortgage from Bank A of #100k

why do I owe the bank any more than the #2k they put down in the first place?

What a ridiculous question.

Thrugelmir

opinions4u wrote: »

Where do you get this strange notion that they magic money up and only have £2k in deposits for each £100k in loans?

OP is refering to Fractional Reserve Banking I suspect.

Around 12% of UK money supply at the peak of the banking boom. Was created by the banks. (Was around 6% in the USA). Hence why BOE has been so active in keeping liquidity up. Without QE the money supply would have contracted. As banks deleverage their balance sheets to comply with new capital adequacy regulations.

Mike63

Not ridiculous. The bank created the #100k just using computer keystrokes to put a number in my account. They did this based upon a capitalisation of about 2%, an example figure. It might seem OK because the bank's balance sheet stays the same, but I think it is your question that is strange. If I lend you #20, can I claim back #1000? Please?

opinions4u

Thrugelmir wrote: »

OP is refering to Fractional Reserve Banking I suspect.

Around 12% of UK money supply at the peak of the banking boom. Was created by the banks. (Was around 6% in the USA). Hence why BOE has been so active in keeping liquidity up. Without QE the money supply would have contracted. As banks deleverage their balance sheets to comply with new capital adequacy regulations.

But it's not as blunt as "magicing" 98% of the amount lent.

Never has been.

Banks do magic up interest - paying savers (including wholesale investors) one rate and charging borrowers a higher one. So a couple of per cent margin.

Securitisation of assets is part of that too. While we've seen such assets valued poorly, leading in part to the downfall of RBS and HBOS, this never amounted to anything like the numbers in the original post, which are complete nonsense to make a ridiculous point.

Mike63 wrote: »

Not ridiculous. The bank created the #100k just using computer keystrokes to put a number in my account.

No they didn't. A customer has to deposit the amount first. That customer is usually an individual or company. It can also be a wholesale funder (typically an American pension scheme). That money is real.

A typical bank balance sheet will, for every £100 of deposits, have £85 of loans and £15 of capital - the capital services withdrawals and cushions bad debt.

They did this based upon a capitalisation of about 2%, an example figure. It might seem OK because the bank's balance sheet stays the same, but I think it is your question that is strange. If I lend you #20, can I claim back #1000? Please?

Thanks for clearing that up for everybody.

Thrugelmir

Mike63 wrote: »

Not ridiculous. They did this based upon a capitalisation of about 2%, an example figure.

Banks hold corporate and retail deposits as well as shareholders capital.

Mike63

No explanation in that. If today there is say #10 trillion stirling in existance and next year there is #12T, where did this #2T come from? It's QE, or bank loans based upon X% capitalisation and Y% magic money. Then the banks have the cheek to ask for the Y% back. If you wish to put a counter argument then I would be pleased to hear it.

opinions4u

More importantly, does your keyboard not have a £ sign on it?

Thrugelmir

Mike63 wrote: »

If you wish to put a counter argument then I would be pleased to hear it.

I would refer you back to the comment in post 2. You signed a contract to repay the money.

So any personal like or dislike of the banking system is irrelevant. As it's what we've got currently.