Banking system resources

You can upload files eg PDF's to the AEP Face book page if you click on the files link under the banner you will see there is already a couple there.

Oh also sjjfowler can you post a link to the guardian article and comment thread in the comment bombing section? I'll go in this weekend and have a crack too ... Thanks again!

The Guardian comment threads are only writable for a few days - the thread is long-locked now. Though the commenter did track me down in a different (completely unrelated) thread and post the text of an email he got from someone at the reserve bank, which I'll post here (since it was posted on a public board I don't think there are any privacy questions):

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Thank you for your email.

In Australia, the mechanism whereby monetary supply is increased is referred to by the term ‘fractional reserve banking’, which is part of the basis of modern economies.

Fractional reserve banking is a system of banking that exists all over the world, including Australia. It is part of the basis of modern economies and the process supports economic growth. The term 'fractional reserve banking' refers to the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder. All banks have the capacity to create money and add to the total money supply when they issue loans. For example, let's imagine a scenario where I decide to deposit $100 in a bank. The bank's experience would suggest that it only needs to keep a fraction of this deposit on hand in reserve in case I want to withdraw some of it, so it can lend out the remainder. There are also regulations on the proportion that it must keep. So, for instance, if it faces a 20 per cent capital requirement (enforced by the regulator), it can lend the remaining $80 to you and keep the remaining $20 in reserve.

In issuing this loan, an extra $80 is created, which appears on the bank's balance sheet. I still have $100 deposited in the bank and you, as the new borrower, have received $80. The total amount of money in existence is now $180. When you eventually repay the $80 loan it no longer appears on the bank's balance sheet and the total amount of money returns to $100. If you don't pay back the loan, the bank loses $80 worth of assets on its balance sheet (so banks carefully assess loan applications in order to minimise potential losses). If you decide you don't want to spend the $80 immediately and decide to put the money in another bank, this entire process is repeated. That second bank can lend out 80 per cent of this $80 to a third person, which creates an extra $64 dollars. In this way, the total amount of money in existence is constantly changing, as people borrow and pay off loans.

It is also important to remember that the money created through the process of fractional reserve banking (explained above) is real money, even though it does not exist as a physical unit of currency (notes or coins). Most of the money in the world exists on the balance sheets of banks, businesses and individuals and most transactions take place electronically.

Australian banks are governed by regulations and legislation, most notably the Banking Act 1959. They are tightly regulated by the Australian Prudential Regulation Authority (APRA). APRA controls the amount of capital and liquidity that banks are required to maintain in reserve, including the amount of liquid capital they must hold. This ultimately restricts the total amount they can lend. You may wish to contact APRA for more details about the regulations that apply to banks in Australia.

The Reserve Bank’s website also includes guidance on its open market operations that may be of interest to you.

Michael

Michael Leslie | Communications Officer | Media & Communications
RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000

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The commenter seems to think this backs up his argument (the classic mythical description), but a closer reading suggests it's more grounded in reality (particularly when it refers to "capital requirements" rather than referring to reserves).

And a blog by Bill Mitchell directly referring to the Bank of England paper I referenced above: bilbo.economicoutlook.net/blog/?p=31063

Eric Tymoigne has a new text book available on Money and Banking all 258 pages

Throughout the material, the concept of balance sheet is central and used to analyze all the topics presented. Not only are balance sheets relevant to understand financial mechanics, but also they force an inquirer to fit a logical argument into double-entry accounting rules. This is crucial because if that cannot be done there is an error in the logical argument.

neweconomicperspectives.org/money-banking