Beyond “Money as debt”2

Here’s the second part.As before:

I would like to have feedback and proposals on how to improve it The voice in the video is made by a “text to speech” engine and should be replaced by a more pleasant voice (is there anyone that wants to do it voluntarily? When the text is finally edited?)

Most of this is based on a blogg written by “Sunda pengar” and in particular his excellent blogg dealing with Basel 2:

Here’s the “text to speech” text and I should very much appreciate corrections in grammar and other issues concerning the language – since English is not my native language. Feel free to come with pedagogical remarks as well – where I’ve been to vague and so on. This is meant as an outline so I’m opened for suggestions.

Please refer to the number you think should be altered. It will be an easy thing to correct and replace it in the “text to speech” engine and put it back into the video.


Another misconception is that banks transfer money directly between themselves. It’s commonly believed and perhaps according to the publics intuition that one bank send over the money directly to another bank in transactions between the banks. But the only time this occur is when a customer of his or her bank take physical cash out from his or hers deposit and walks over to the other bank and hand it over to another bank. But even then central banks money also known as bank reserves , in the form of cash, is used.

In all other instances the process is as follows:


Lets say that a customers transfer 1000 dollar from one bank to the other through Internet. The 1000 dollar is then taken from the banks reserves and transfered to the other banks reserves through the central banks clearing system. The bank sending the money will decrease their reserves by 1000 dollar and the receiving bank increase their reserves with 1000 dollar. Note that nothing is changed in the banks balance sheets.


But the first banks reserves have now shrank below the reserve requirement for the bank so it will have yo lend some central bank money back from, for instance, the bank that received the 1000 dollar, since this bank now have a surplus of central bank money. The second bank can then lend back the money to the first bank at an interest, the so called LIBOR rate, and restore the first banks reserves. So banks coordinate their transactions between them selfs through their reserves via the central banks clearing function. The process is called interbank lending.

Again: note that the balance sheets of neither banks are touched.


But what if the second bank don’t want or can’t lend back the money to the first bank?

5) The central bank can then step in an lend money to the bank with a deficit in their bank reserves. This is done by something call repurchase agreement, also known as repo. This repo also has an interest an is an instrument for the central bank to control the banks reserves and hence the banks interest and credit expansion.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: