Posted 12/13/2014 10:26 (#4237429 - in reply to #4237399) Subject: RE: Banking, one more time....
Read down in your link, gac gets it:
"When an individual bank (bank A) makes a loan, it creates (credits) an asset (receivable). To make its books balance, it debits its reserve account at the Fed (also an asset) by the same amount."
The debits and credits above are incorrect. An increase in an asset account is created via a debit. An increase in a liability account is made via a credit. So, when Bank A makes a loan, it debits the Loans Receivable account on its books. To makes its books balance, it creates (credits) a new liability account in the name of the borrower, no differently than if the borrower had made a cash deposit at the bank. Reserves do not come into play, except for the requirement that Bank A have the required reserves at the Fed to back the newly made loan.
Further to my earlier post, here's how back reserves come into play when a bank loan is made.
When the borrower proceeds to draw down his new loan account at Bank A by writing cheques on it, those cheques will be cashed at Bank A or any other bank.
If the cheques are cashed at Bank A and cash is disbursed, Bank A will credit (reduce) its holdings of cash and debit (reduce) the borrower's liability account on its own books.
Alternatively if the cheques are cashed at Bank B, Bank B's cash holdings will also be reduced, and its Reserves held at the Fed (an asset account on its books) will be debited (increased) commensurately. Bank B will then send the cheques drawn on Bank A for clearing at the pertinent Fed branch and Bank B's reserves with the Fed (a liability account on the Fed's books) will be credited (increased), while Bank A's reserves will be debited (reduced).
I realize the above can get confusing as debits and credits have a opposite effects depending on whether they are applied to asset or liability accounts."
The important thing to note from all this is that at the individual bank level money is not "created." Assets = Liabilities + net worth and where ever there is a new asset created there is a corresponding liability created.
Banking, one more time....
"When an individual bank (bank A) makes a loan, it creates (credits) an asset (receivable). To make its books balance, it debits its reserve account at the Fed (also an asset) by the same amount."
The debits and credits above are incorrect. An increase in an asset account is created via a debit. An increase in a liability account is made via a credit. So, when Bank A makes a loan, it debits the Loans Receivable account on its books. To makes its books balance, it creates (credits) a new liability account in the name of the borrower, no differently than if the borrower had made a cash deposit at the bank. Reserves do not come into play, except for the requirement that Bank A have the required reserves at the Fed to back the newly made loan.
Further to my earlier post, here's how back reserves come into play when a bank loan is made.
When the borrower proceeds to draw down his new loan account at Bank A by writing cheques on it, those cheques will be cashed at Bank A or any other bank.
If the cheques are cashed at Bank A and cash is disbursed, Bank A will credit (reduce) its holdings of cash and debit (reduce) the borrower's liability account on its own books.
Alternatively if the cheques are cashed at Bank B, Bank B's cash holdings will also be reduced, and its Reserves held at the Fed (an asset account on its books) will be debited (increased) commensurately. Bank B will then send the cheques drawn on Bank A for clearing at the pertinent Fed branch and Bank B's reserves with the Fed (a liability account on the Fed's books) will be credited (increased), while Bank A's reserves will be debited (reduced).
I realize the above can get confusing as debits and credits have a opposite effects depending on whether they are applied to asset or liability accounts."