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"Banks are never reserve-constrained"

Hey Cullen, I've read a lot of your stuff & love it. Anyways:

I've heard you say banks are never reserve-constrained (which obviously relates to your points about the endogeneity of money creation. I also assume you don't like the money multiplier concept).

What are banks constrained by then? And when a bank DOES has a liquidity issue (like Northern Rock or Citi in 2008), what exactly did they "run out" of?

Cullen knows far more than me on this topic, but I believe the answer is "capital".  Banks are capital constrained.

Hi @davisclute,

Yes, Steve is correct. It's better to say banks are capital constrained. The Fed will always lend reserves to a solvent bank. Always. They will even lend reserves to banks that are borderline insolvent. So banks never have trouble obtaining reserves if they need them and remain solvent. But if the bank cannot meet its capital requirements then the Fed will essentially shut them down and the FDIC will come in and wind them down.

The key point with lending, however, is that banks don't even lend reserves to non-banks. Yes, they lend reserves to other banks, but never to non-banks. So when I say banks aren't reserve constrained I really mean that banks don't rely on reserves to make new loans in the money multiplier sort of sense that we read about in textbooks.

I hope that helps.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Hey @cullen-roche,

Thanks for the answer. My follow up:

When you say 'capital constrained' -- what exactly is capital here? Just the equity on its balance sheet - literally just Assets - Liabilities?

 

Or is it liquidity (which could be reserves, Treasuries, or highly liquid corporate bonds, etc)?