Debt amnesty. Could this work?

Scrubber

Loughton_Monkey wrote: »

I continue to be gobsmacked by the sheer volume of people who fall for this 'money creation' myth. Is it the education system to blame? Or is it just senile confusion on the part of those who are such dinasoars that they fail to understand 'electronic banking'?

I was reading a landlord forum where one landlord with a big portfolio of properties did a really long posts full of astonishment at how banks create magic money to lend.

This response from one of the landlords was at least sensible, is same as my position.

However banks make, create or borrow money is frankly their business, and that of their shareholders, and not any of ours.

We choose to borrow it, they don't force us to buy houses, outbid others, when we apply for mortgages from the banks.

If we then default, we have failed and have to take what's coming.

It's pretty simple really.

theEnd

princeofpounds wrote: »

Huh? Nope...

Capital adequacy is the amount of capital - principally equity, money supplied by shareholders - required to acquire assets (like making loans) using liabilities (like customer deposits).

It forms the buffer for the depositor, and is what helps to make banks safe places to put your money.

If the loan goes bad and make a loss, it gets deducted from capital first. The bank's shareholders are forced to put their own money at risk for anything the bank does with your deposits.

But if the loan makes a profit in excess of the cost of the deposit, the owners of the capital - the shareholders - get the profit.

More risk, more reward, which is why a bank might make a return on equity of, say, 9%, and you get 1% in your savings account.

If you extend a loan, you will need to use more capital. But if you get a deposit, you do NOT reduce your capital.

(Edit to add)

I should also mention that the way that equity is calculated in an accounting sense, and the way capital is calculated according to regulations, are actually slightly different.

The main difference is that regulators will 'risk-weight' assets, such as saying that government bonds are so safe you can put money in there without using your own capital. Personally I think the whole concept of risk-weighting is silly, but that's a complication for another time.

It is very similar to having one set of books for accounting purposes, and another set for tax accounting which obeys slightly different rules.

But for simpicity's sake, you can ignore the difference to understand the concept.

Agree with all of that, so maybe not making myself clear.

I'm trying to point out the subtle, but very significant order in which things happen. The loan creates the deposit, rather than the deposit allowing for the loan to be issued.

The capital adequacy is a limiting factor and needs to be adjusted for a small proportion of the loan when issued (and all of the loan if defaulted later).

Generali

theEnd wrote: »

Agree with all of that, so maybe not making myself clear.

I'm trying to point out the subtle, but very significant order in which things happen. The loan creates the deposit, rather than the deposit allowing for the loan to be issued.

The capital adequacy is a limiting factor and needs to be adjusted for a small proportion of the loan when issued (and all of the loan if defaulted later).

The first thing that is needed is a deposit or other injection of cash into the banking system assuming that the bank was previously at the limit for capital adequacy purposes. From that a loan can be made which will create a deposit which will allow a loan to be made which will create a deposit and so on.

You are certainly right to say that capital adequacy is the theoretical limiting factor. However another is the appetite for debt: there comes a certain point where people simply don't want to borrow any more.

The reality is a little bit more complex as not all loans are created equal when it comes to holding them in reserve: a 20% LTV mortgage is very different to a pay day loan on the balance sheet!