Thread by @TheCareFreeBear

@MacroAlf @JackFarley96 Did someone say get started? 👀

@MacroAlf @JackFarley96 I think that what leads to confusion is that there are a lot of constraints, legal and in terms of "wanting to take risks" on banks and it is the mix that leads to their choice of composition of balance sheet.

@MacroAlf @JackFarley96 I am going to take it from the top and possibly on the chin, for the benefit of the rest who also don't know :)

This is a typical bank b/s. Now let's make some "simplified defitions" i.e not true once

@MacroAlf @JackFarley96 Capital (or equity in this pdf p165 metrobankonline.co.uk/globalassets/i… ) is what got raised in the IPO(share prem.) and is an account that can only be used for certain things e.g absorb losses. The latter should be related to the "capital req.", which is not the same as "reserve req."

@MacroAlf @JackFarley96 "Reserves" are trickier, what do we mean by that? The "Physical cash" the bank obtains when they take in a Deposit? or the "Bank reserves" they get via e.g QE?

So lets just not define reserves and just say "Physical cash" and "Bank reserves"

@MacroAlf @JackFarley96 But what are then reserve req.? urg! Lets shot from the hip again(as we constantly have to since words are used willy nilly here..and in finical statements..) and say that it is not "Bank reserves" since this is "inside money", they can certainly not be paid out to people.

@MacroAlf @JackFarley96 But there are not only these two constraints! The shareholders would probably not be very happy if their capital was being used in an irresponsible manner. Giving us a "risk-taking capital constraint"...

@MacroAlf @JackFarley96 So we have "defined" capital, capital req. ,physical cash, reserve req. and "bank risk willingness"... at least in a crude way for the sake of discussion.

@MacroAlf @JackFarley96 Bank reserves has no clear role yet, if it is an asset with non trivial risk weight then all else equal it "weighs" on capital w.o helping in the ability to take risk..or do they somehow alter bank ability to e.g make a loan?

@MacroAlf @JackFarley96 This guy really know what he talking about, but please dont ask him anything within this thread. He seams to say that what I call bank reseves can be used to get cash to cover deposit withdrawls..but thus confuses me as it should be inside money...

@MacroAlf @JackFarley96 So maybe the Bank reseves(as well as Physical cash) can be used to cover withdrawl liabilites.. it dosnt really make a diffrence in relation credit creation, not in the regard anyway..

@MacroAlf @JackFarley96 Ok..now a bank makes a loan i.e creates a deposit thus increases need for reservs. At the same time it creats an asset increseing need for capital both in term of regulatory need and also crowding out other assets on the asset side...

@MacroAlf @JackFarley96 ...the latter being related to r/r wrt b/s composition in realtion to shareholders.

@MacroAlf @JackFarley96 @MetreSteven ☝️ (@santigaoaufund since you agreed on vid.)

1/3 Check out what I came up with. I tried to simplify it yet keep it within the realm of truth.

My conclusion is that it is wrong to say that one can *lend against* reserves..>

@MacroAlf @JackFarley96 @MetreSteven 2/3 Sure, to make a deposit one needs "reserves" but that's only half the story, one also needs capital. As reserves are an asset and a loan an additional asset, the reserves only make things "worse" in terms of cap. req. ..>

@MacroAlf @JackFarley96 @MetreSteven 3/3 In conclusion it is only "half technically" true to say that one can lend against reserves. Note that we also need to take banks risk allocation against its capital, they might think other things than making loans look better. Hence even if cap. req. is OK,they might not lend

@MacroAlf @JackFarley96 @MetreSteven @SantiagoAuFund ☝️ dont gimme the tldr! 😇