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Do Banks use deposits to fund operations? i.e. payroll, utility bills, etc

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Posted by mpstrunk (Questions: 4, Responses: 3)
Posted on 08/29/2017 11:02 AM
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Banks have bank accounts with the Central Bank. So think of them as settling payments in their own little banking system. So yes, banks settle payments in reserve deposits, but they don’t have deposit accounts like you or I do.

Of course, some banks have subsidiary elements that do use their deposit system. So it’s kind of a blend of the two since all big banks these days are really a mish mash of reserve system using bank ops and subsidiary deposit using bank operations.

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Cullen Roche Posted by Cullen Roche (Questions: 10, Responses: 1749)
Answered on 08/29/2017 11:45 AM
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    I might be wrong, but I think Cullen might not have grasped what the questioner was asking.

    As I said, I might be wrong, but I think the question being asked is “do banks use customers deposits to fund their own operations”. It’s the sort of question I see asked quite often and stems from a fundamental misunderstanding of what banks are and what customer deposits are. The question, and ones like it, arise from a belief in the loanable funds model of banking, where customers deposit money in a bank, which then uses the deposit to make loans, or possibly, to fund its operations.

    Because the loanable funds model does not describe banking and money in the modern economy, I would have to say that the answer to the question is an unequivocal “no”.

    As i often advise, it can sometimes be useful to consider the entire banking system as consisting of one large bank. When this large bank has to pay a utility bill, pay staff etc, it does so by simply crediting the recipients’ accounts – that is by creating new customer deposits, which is creating new money. There is no change to the asset side of the big bank’s balance sheet when doing this (there would be if the big bank was purchasing an asset from a customer rather than paying a bill).

    Because these new deposits are new liabilities of the bank, and by using the identity that total assets less total liabilities equals shareholders’ own funds (or equity), it’s clear that shareholders’ own funds drops by the exact same amount as the payments the big bank has made. It should be clear, therefore, that the bank has effectively used its own shareholders’ funds to pay its utility bill.

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    Posted by Robert Pearson (Questions: 6, Responses: 91)
    Answered on 08/29/2017 2:22 PM
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      As Robert says, the question is not specific.

      A deposit remains a debt to the depositor and so literally cant be a long term source of funding for expenses.

      If it the question refers to deposit as the liability side of the balance sheet then yes, Bank’s pay payroll with an entry to liabilities, if the employee has an account with the bank.

      In the long term, Funding expenses has to come from revenues, interest payments , bank charges, or shareholder funding.

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      Posted by Dinero (Questions: 22, Responses: 333)
      Answered on 08/30/2017 6:34 AM
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        > Robert

        “… and by using the identity that total assets less total liabilities equals shareholders’ own funds (or equity)… “

        just as a matter of interest that identity is not use in the banking industry, as far as I can tell. I know we have used it on the forum in the past , but the Industry defines capital as shareholder paid in funds plus retained earnings. Academically the identity suffices , but doesn’t work for making sense of banking Industry documents.

        see BIS Basel iii “definition of capital”
        http://www.bis.org/bcbs/basel3.htm.

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        Posted by Dinero (Questions: 22, Responses: 333)
        Answered on 08/30/2017 7:52 AM
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          if you look at any bank balance sheet, you will see that total assets equals total liabilities plus total equity (shareholders’ own funds). Equity will be broken down into paid in share capital, share premium account, retained earnings and some adjustments such as reserves. All of that is attributable to shareholders.

          The number might well be different from regulatory capital, as Basle rules will mandate certain adjustments, and it will almost certainly be different to a market capitalisation, but the basic accounting rule still applies, total assets less total liabilities equals bank capital (also called equity, also called own funds and also called shareholders’ own funds)

          This from the BofE: “As an accounting rule, total liabilities plus capital must equal total assets.”
          http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130302.pdf

          and the Fed: “Capital acts as a financial cushion to absorb unexpected losses and is the difference between all of a firm’s assets and its liabilities.”
          https://www.federalreserve.gov/faqs/cat_21427.htm

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          Posted by Robert Pearson (Questions: 6, Responses: 91)
          Answered on 08/30/2017 8:48 AM
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            Those academic statements are true , but the equity is not calculated as the residual of assets minus liabilities.

            If you look at a balance sheet you see that the capital statement is not the result of a net calculation.
            Random google search – https://www.google.co.uk/search?client=firefox-b-ab&q=pdf+City+national+bank+of+florida+financial++statement+2005+2006

            From the base iii Document – Equity consists of common share capital paid in plus retained earnings. No mention of assets at all.

            So in the one bank scenario when an expense is paid a liability moves from shareholders equity liability to deposit holder liability. And likewise when a deposit holder makes an interest payment the liability moves from deposits to retained earnings ,equity.

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            Posted by Dinero (Questions: 22, Responses: 333)
            Answered on 08/30/2017 11:51 AM
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              well, you’ve got me confused. I’m looking at that random bank balance sheet for 2006 and I see total assets (in $000s) of $2,753,472 and total liabilities of $2,476,790. The difference between these two numbers is $276,682 (I had to use a calculator for that). Then I look at the statement of stockholder’s equity further into the report and I see common stock of $14,200, capital surplus of $14,200, retained earnings of $250,788 and an accumulated other comprehensive loss of ($2,506). If I had all those items up, I get total stockholder’s equity of……….$276,682 – which looks to be exactly the same as the number I got for total assets less total liabilities. This is the power of double entry book-keeping!

              In your final paragraph, you seem to be agreeing with me that when a hypothetical one bank pays an expense, shareholder’s equity goes down and deposit liabilities increase by the same amount and when a bank receives a payment from a deposit holder, deposit liabilities decrease and shareholder’s equity increases by the same amount (as you say, it’s the retained earnings line that increases) – although I wouldn’t have described the payment from a deposit holder as an interest payment, unless you are considering one of the handful of currencies with negative deposit rates!

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              Posted by Robert Pearson (Questions: 6, Responses: 91)
              Answered on 08/30/2017 12:35 PM
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                Most interest payments on mortgages are paid from a deposit account held at the bank, so that needs to be accounted for.

                We are probably in agreement because you said yourself equity will be broken down into paid in share capital, share premium account, retained earnings and some adjustments such as reserves. ie no mention of assets.

                I am harking back to an earlier question “Bank Loan payments explanation for dummies”
                There capital was calculated as assets minus liabilaites , but actually that is not done in the Industry. I think it is relevant to acknowledge that, to give thorough answers to such questions.

                Did you read the BIS Basel iii document, definition of capital. What did you think of it.

                I am harking back to the explanation we gave earlier to a Question “how to account for interest payments maid to a bank”

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                Posted by Dinero (Questions: 22, Responses: 333)
                Answered on 08/30/2017 1:05 PM
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                  -Typo

                  last line was a repeat.

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                  Posted by Dinero (Questions: 22, Responses: 333)
                  Answered on 08/30/2017 1:06 PM
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                    Robert

                    thank you for your answer. that was my question

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                    Posted by mpstrunk (Questions: 4, Responses: 3)
                    Answered on 08/31/2017 10:38 PM
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                      “Do Banks use deposits to fund operations? i.e. payroll, utility bills, etc”

                      They are not supposed to. In the US, for every dollar on deposit, the depository institution is required to keep 10% of that ($0.10) in reserves, and allowed to loan out the other 90%. But operations are supposed to be funded out of operations, which includes interest on those loans (which are assets of the bank).

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                      Posted by DeltaV (Questions: 2, Responses: 7)
                      Answered on 09/07/2017 8:58 AM
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                        They way you have written that is a bit misleading.

                        Sure, the minimum reserve requirement in the US is set at 10% of the total amount of a bank’s demand and checking accounts. A bank has to keep a balance in their federal reserve account of at least this amount. But that is not the same thing as saying a bank has to keep 10% of eligible deposits in reserve – which allows them to lend out the other 90%.

                        That’s describing a loanable funds model of banking, specifically the fractional reserve model of banking, which if you read the following paper. by a certain Mr Cullen Roche, you will understand doesn’t explain the banking and money creation system in use in the USA (and most other advanced economies):
                        https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625

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                        Posted by Robert Pearson (Questions: 6, Responses: 91)
                        Answered on 09/07/2017 9:20 AM
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