What are the ledger entries? How if banks borrow more money can they then bolster their capital adequacy ratios so they can then create more credit to lend? Am I missing something? It would seem the more Banks borrow the more they can gear up, their lending. Or does this just mean banks only lend out what they first borrow? But that does not make sense. If that is the case where is money created in the economy. To my simple farmer mind lending out someone else's money is not creating credit! I hope you can help; this is a problem that has been bugging me for years.
The reason they banks issue bonds is for capital adequacy purposes. And the reaon they do so in USD and EUR is that these markets have depth. They can always hedge currency risk.
Doubtless, the RBA trusts the BoE to store its gold on an earmarked basis. Furthermore, the BoE arranges for swaps and leases giving income to the RBA.
Russia and China take the view that possession of gold is vital. Just imagine if Russia had any gold stored at the BoE. Would the BoE have seized Russia's gold on instructions from the US Treasury, or honour its custodial contract? Putin and Xi don't risk it for obvious reasons, wanting their gold under their control.
Thankyou Alastair for your explanation. That must mean that the USD Euro bonds become an asset in the hands of the Australian bank, thereby increasing the amount of credit they can create?
Alastair, as a new subscriber may I ask two preliminary questions?
I understand commercial or trading banks create credit when they make loans to customers. The amount of credit they create is only limited by the capital adequacies requirements. (Of course, they need to make loans to customers who they are confident can repay the interest and principal) I cannot find a credible answer as to why in Australia our banks annually borrow around $80 billion on the US, European bond markets in either Euros or USD. Why would they do this? and dose it not expose Australian banks to currency risk? And Australia is a big producer of gold, yet our central bank holds barely any gold in Australia. The RBA's holdings of gold are held in London. Would it not be prudent for the RBA to do a DE Gaulle and bring our gold reserves back to Australia? Does Russia and China hold their gold in London?
Alasdair always provides the big, long term picture that no one else seems interested in.
If the bank issues a bond in any currency, it is not an asset but a liability to the bank. But it will increase the amount of credit it can create.
What are the ledger entries? How if banks borrow more money can they then bolster their capital adequacy ratios so they can then create more credit to lend? Am I missing something? It would seem the more Banks borrow the more they can gear up, their lending. Or does this just mean banks only lend out what they first borrow? But that does not make sense. If that is the case where is money created in the economy. To my simple farmer mind lending out someone else's money is not creating credit! I hope you can help; this is a problem that has been bugging me for years.
The reason they banks issue bonds is for capital adequacy purposes. And the reaon they do so in USD and EUR is that these markets have depth. They can always hedge currency risk.
Doubtless, the RBA trusts the BoE to store its gold on an earmarked basis. Furthermore, the BoE arranges for swaps and leases giving income to the RBA.
Russia and China take the view that possession of gold is vital. Just imagine if Russia had any gold stored at the BoE. Would the BoE have seized Russia's gold on instructions from the US Treasury, or honour its custodial contract? Putin and Xi don't risk it for obvious reasons, wanting their gold under their control.
Thankyou Alastair for your explanation. That must mean that the USD Euro bonds become an asset in the hands of the Australian bank, thereby increasing the amount of credit they can create?
Alastair, as a new subscriber may I ask two preliminary questions?
I understand commercial or trading banks create credit when they make loans to customers. The amount of credit they create is only limited by the capital adequacies requirements. (Of course, they need to make loans to customers who they are confident can repay the interest and principal) I cannot find a credible answer as to why in Australia our banks annually borrow around $80 billion on the US, European bond markets in either Euros or USD. Why would they do this? and dose it not expose Australian banks to currency risk? And Australia is a big producer of gold, yet our central bank holds barely any gold in Australia. The RBA's holdings of gold are held in London. Would it not be prudent for the RBA to do a DE Gaulle and bring our gold reserves back to Australia? Does Russia and China hold their gold in London?