Pragmatic Capitalism

Capital for Living a More Practical Life

What does “banks running out of liquidity” mean when they can create credit ex nihilo?

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During the 2008 crisis I do not understand what the history books mean when they say that banks “ran out” of liquidity causing the credit crisis? I thought banks can create credit ex nihilo so what exactly stopped them from just doing business as usual?

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Posted by Incognito 7
Posted on 03/24/2017 10:26 AM
Private answer

A bank runs out of liquidity when they don’t have willing holders of their liabilities. Banks are in the business of funding their long-term liabilities with short-term assets. When they can’t access the market to manage their short-term liabilities they are illquid and they can’t meet capital requirements. That’s when regulators come in and put them to sleep. That’s what happened to Lehman.

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Cullen Roche Posted by Cullen Roche
Answered on 03/25/2017 5:58 PM
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