(Holmes, 1969 page 73 at the time Senior Vice President of the Federal Reserve Bank of New York responsible for open market operations), cited in Bank and Credit the Scientific Journal of the National Bank of Poland. " In the real world, banks extend credit, creating deposits in the process, and look for reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand...'"
Glen Stevens, the Australian Economy: Then and now. Reserve Bank of Australia. " money multiplier, as an introduction to the theory of fractional reserve banking. I suppose students have to learn that, and it is easy to teach, but most practitioners find it to be a pretty unsatisfactory description of how the monetary and credit system actually works. In large part, this is because it ignores the role of financial prices in the process."
Paul Tucker, Money and credit: Banking and the Macroeconomy. Bank of England. " Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer's current account, which can be paid away to wherever the borrower wants by the bank 'writing a cheque on itself'. That is, banks extend credit by creating money. This 'money creation' process is constrained by their need to manage the liquidity risk from the withdrawal of deposits and the drawdown of backup lines to which it exposes them. Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence ...'"
Modern Money Mechanics. Page 37. Money Creation and Reserve Management (PDF). Federal Reserve Bank of Chicago. " In the real world, a bank's lending is not normally constrained by the amount of excess reserves it has at any given moment. Rather, loans are made, or not made, depending on the bank's credit policies and its expectations about its ability to obtain the funds necessary to pay its customers' checks and maintain required reserves in a timely fashion ...'"
The fedwire funds service. Overdrafts and risk control (PDF). Federal Reserve. " the Federal Reserve Banks can extend credit to most Fedwire Funds Service participants lacking sufficient balances to cover their payment instructions. This exposes the Federal Reserve Banks to risk of loss. To limit exposure, the Federal Reserve Banks have adopted a comprehensive daylight overdraft control policy ...'"
The fedwire funds service. Overdrafts and risk control (PDF). Federal Reserve. " the Federal Reserve Banks can extend credit to most Fedwire Funds Service participants lacking sufficient balances to cover their payment instructions. This exposes the Federal Reserve Banks to risk of loss. To limit exposure, the Federal Reserve Banks have adopted a comprehensive daylight overdraft control policy ...'"
A handbook of alternative monetary economics, by Philip Arestis, Malcolm C. Sawyer, p. 53
Glen Stevens, the Australian Economy: Then and now. Reserve Bank of Australia. " money multiplier, as an introduction to the theory of fractional reserve banking. I suppose students have to learn that, and it is easy to teach, but most practitioners find it to be a pretty unsatisfactory description of how the monetary and credit system actually works. In large part, this is because it ignores the role of financial prices in the process."
White, W. Changing views on how best to conduct monetary policy: the last fifty years. Bank for International Settlements. "Some decades ago, the academic literature....emphasised the importance of the reserves supplied by the central bank....., and the implications (via the money multiplier) for the growth of money and credit. Today, it is more broadly understood that no industrial country conducts policy in this way under normal circumstances....there has been a decisive shift towards the use of short-term interest rates as the policy instrument [in industrialised countries]. In this framework, cash reserves supplied to the banking system are whatever they have to be to ensure that the desired policy rate is in fact achieved."
Freedman, C. Reflections on Three Decades at the Bank of Canada. Bank of Canada. "It used to be that most academic research treated money (or sometimes base) as the exogenous policy instrument under the control of the central bank. This was an irritant to those of us working in central banks, because the instrument of policy had always been the short-term interest rate, and because all monetary aggregates (beyond base) have always been and remain endogenous. In recent years, more and more academics, in specifying their models, have treated the short-term interest rate as the policy instrument, thereby increasing the usefulness of their analyses..."
Disyatat, P. 2010 The bank lending channel revisited.. Bank for International Settlements. "Page 2. the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Page 7 When a loan is granted, banks in the first instance create a new liability that is issued to the borrower. This can be in the form of deposits or a cheque drawn on the bank, which when redeemed, becomes deposits at another bank. A well functioning interbank market overcomes the asynchronous nature of loan and deposit creation across banks. Thus loans drive deposits rather than the other way around."
Montador, B. The implementation of monetary policy in Canada. Bank of Canada. "Required reserves have traditionally been justified by a desire to influence the size of the money multiplier and by prudential concerns. However, central banks' views about money supply determination have for a long time been that the money stock is demand determined"
Paul Tucker, Money and credit: Banking and the Macroeconomy. Bank of England. " banks....in the short run.....lever up their balance sheets and expand credit at will....Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer's current account.....This 'money creation' process is constrained by their need to manage the liquidity risk from the withdrawal of deposits and the drawdown of backup lines to which it exposes them."
Charles Goodhart, 2010. Money, Credit and Bank Behaviour: Need for a new approach. "The standard approach, in teaching and textbooks....that centred around the money multiplier...should be discarded immediately. The practical realities, whereby the central bank and the commercial bank set the interest rates at which they will operate, and then the various agents in the private sector and amongst the banks determine monetary quantities endogenously, is more complex but has the advantage of realism"
Mervyn King, Finance: A Return from Risk. Bank of England. " Banks are dangerous institutions. They borrow short and lend long. They create liabilities which promise to be liquid and hold few liquid assets themselves. That though is hugely valuable for the rest of the economy. Household savings can be channelled to finance illiquid investment projects while providing access to liquidity for those savers who may need it.... If a large number of depositors want liquidity at the same time, banks are forced into early liquidation of assets - lowering their value ...'"
Paul Tucker, Managing the central bank's balance sheet: Where monetary policy meets financial stability. Bank of England. " This reflects .... the way risk is managed in a fractional-reserve banking system....Commercial banks....in the business of providing liquidity insurance to their customers - via deposits withdrawable on demand....are themselves inherently susceptible to liquidity crises. In consequence, customers want to be assured that banks can maintain convertibility into central bank money (notes).....the largest banks cannot buy liquidity insurance from each other without incurring an unacceptable level of (contingent) counterparty credit risk. They have to self insure, which they do by holding high-quality assets that can be exchanged at the central bank for 'cash' - or, rather, for a credit to their account at the central bank. ...'". "given this way of implementing monetary policy, money - both narrow and broad - is largely endogenous. The central bank simply supplies whatever amount of base money is demanded by the economy at the prevailing level of interest rates."
Nigel Jenkinson, Strengthening Regimes for Controlling Liquidity Risk: Some Lessons from the Recent Turmoil. Bank of England. " Commercial banks ....are inherently exposed to liquidity risk - the risk that a bank is unable to meet its commitments should depositors attempt to withdraw their funds ahead of the bank's capacity to repay them....There is, however, one last line of defence left. A bank holding a buffer of reliable high quality liquid assets, such as Treasury bills or other government securities, can draw on them immediately and directly in the event of a sudden withdrawal of market liquidity.'"
The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors by Jonathan Golin. Publisher: John Wiley & Sons (August 10, 2001). ISBN 0471842176 ISBN 978-0471842170
