While I agree that a bonfire of the economics textbooks would be a net addition to humanity's welfare, that begs the question: What are people actually being trained to be bankers assigned to read? Presumably, at some point they have to be instructed in how to go about the daily business of banking. Do banking and finance students learn this in college or grad school, or do they only learn it once on the job?
I have a few references scattered through my articles, but “The Moorad Choudhry Anthology” is the one I mainly looked at. I worked on the funding team at “La Caisse de dépôt”, and pretty much all the portfolio managers in my group worked in bank treasury departments. They need to know how bank funding department work, all the instruments they deal with, but they don’t spend much time worrying about the existential question that is “where does the funding ultimately come from?” I can write an example article like this and explain what it means without needing much theory - it’s just basic balance sheet analysis system-wide.
"a bank is created by a group of people injecting equity into a new legal entity. So yes, we need capital from “savers” for a bank to exist — but that may have happened more than a century earlier."
There's another option. A limited liability bank can issue non-paid up capital which then sit outside the limited liability shell, giving the bank the right to draw on the issuee's resources in a loan loss situation up to a certain amount.
Many a historic bank bootstrapped in such a way via such promises - including the Bank of England.
The modern 'ratios' can be seen as barriers to entry erected to protect an oligopoly solely because the central bank doesn't want to do its job - offer backstop discounts to loans its regulatory framework has permitted.
The bank is going to need a building and liquid assets to support withdrawals, pay lawyers, and from what I can tell, buy a preferred share in the Federal Reserve if it is in the US. So it needs some injections before starting up. And presumably the non-paid in capital has to be backed by existing assets to be taken seriously. So we still end with a need for existing financial assets to be injected (or at least exist) before the bank starts lending operations.
It doesn't need to be existing financial assets. If the people 'backing the bank' have sufficient gravitas, then others will take the bank's promises in return for output.
Withdrawals within the horizontal circuit are just assigning an existing deposit to a different entity (which may be another bank).
It can all be done on promises. Taxation is a sufficient, but not necessary, mechanism to cause a currency to circulate.
Impossible these days, but it is certainly how some historic banks and building societies started up.
Although you might be able to run a bank in the 17th century with just a donated notepad on its balance sheet, I do not think a modern regulator would allow a bank to operate without a computer system in place first. That computer system is a real asset that has to show up on the bank's balance sheet, and so something would have to be injected on the other side of the balance sheet.
Although it might be possible to create a firm solely based on claims on third parties in some jurisdictions, I doubt that this has happed enough times in the past century to make it worthwhile complicating a banking primer.
I'm not suggesting complicating your primer, which is very good and sorely needed given the loons out there. I'm just raising an interesting but entirely side point that it is possible to bootstrap from nothing.
A computer system is just an asset, which can be discounted into new promises on the liability side of the bank's balance sheet like anything else.
Computer companies love vendor financing so they can get their foot in the door. I spent a few years at an outsourcer which persuaded most of its suppliers to finance the venture in such a way. All on a promise.
And that was without deposit holding capabilities.
I find it fascinating how far you can get without needing anything others would call 'money'.
Whether or not money is needed, the bank is going to be leaning on some kind of existing resources. Even if you can find some aggressive IT sales people, their credit risk people will want to see the balance sheets of the guarantors. More importantly, I doubt that any wholesale payments system will allow entities with a $0 balance sheet to connect, and wholesale funding counter-parties would also be hard to convince.
The issue in the text is whether banks can pop into existence without any resources (like the firms in neoclassical models that "borrow" real capital to be used in the production function).
While I agree that a bonfire of the economics textbooks would be a net addition to humanity's welfare, that begs the question: What are people actually being trained to be bankers assigned to read? Presumably, at some point they have to be instructed in how to go about the daily business of banking. Do banking and finance students learn this in college or grad school, or do they only learn it once on the job?
They could read my book when it comes out. :-)
I have a few references scattered through my articles, but “The Moorad Choudhry Anthology” is the one I mainly looked at. I worked on the funding team at “La Caisse de dépôt”, and pretty much all the portfolio managers in my group worked in bank treasury departments. They need to know how bank funding department work, all the instruments they deal with, but they don’t spend much time worrying about the existential question that is “where does the funding ultimately come from?” I can write an example article like this and explain what it means without needing much theory - it’s just basic balance sheet analysis system-wide.
"a bank is created by a group of people injecting equity into a new legal entity. So yes, we need capital from “savers” for a bank to exist — but that may have happened more than a century earlier."
There's another option. A limited liability bank can issue non-paid up capital which then sit outside the limited liability shell, giving the bank the right to draw on the issuee's resources in a loan loss situation up to a certain amount.
Many a historic bank bootstrapped in such a way via such promises - including the Bank of England.
The modern 'ratios' can be seen as barriers to entry erected to protect an oligopoly solely because the central bank doesn't want to do its job - offer backstop discounts to loans its regulatory framework has permitted.
The bank is going to need a building and liquid assets to support withdrawals, pay lawyers, and from what I can tell, buy a preferred share in the Federal Reserve if it is in the US. So it needs some injections before starting up. And presumably the non-paid in capital has to be backed by existing assets to be taken seriously. So we still end with a need for existing financial assets to be injected (or at least exist) before the bank starts lending operations.
It doesn't need to be existing financial assets. If the people 'backing the bank' have sufficient gravitas, then others will take the bank's promises in return for output.
Withdrawals within the horizontal circuit are just assigning an existing deposit to a different entity (which may be another bank).
It can all be done on promises. Taxation is a sufficient, but not necessary, mechanism to cause a currency to circulate.
Impossible these days, but it is certainly how some historic banks and building societies started up.
Although you might be able to run a bank in the 17th century with just a donated notepad on its balance sheet, I do not think a modern regulator would allow a bank to operate without a computer system in place first. That computer system is a real asset that has to show up on the bank's balance sheet, and so something would have to be injected on the other side of the balance sheet.
Although it might be possible to create a firm solely based on claims on third parties in some jurisdictions, I doubt that this has happed enough times in the past century to make it worthwhile complicating a banking primer.
I'm not suggesting complicating your primer, which is very good and sorely needed given the loons out there. I'm just raising an interesting but entirely side point that it is possible to bootstrap from nothing.
A computer system is just an asset, which can be discounted into new promises on the liability side of the bank's balance sheet like anything else.
Computer companies love vendor financing so they can get their foot in the door. I spent a few years at an outsourcer which persuaded most of its suppliers to finance the venture in such a way. All on a promise.
And that was without deposit holding capabilities.
I find it fascinating how far you can get without needing anything others would call 'money'.
Whether or not money is needed, the bank is going to be leaning on some kind of existing resources. Even if you can find some aggressive IT sales people, their credit risk people will want to see the balance sheets of the guarantors. More importantly, I doubt that any wholesale payments system will allow entities with a $0 balance sheet to connect, and wholesale funding counter-parties would also be hard to convince.
The issue in the text is whether banks can pop into existence without any resources (like the firms in neoclassical models that "borrow" real capital to be used in the production function).