Tuesday, March 26, 2013

Banking Example #1.2: Loan & Deposit Transfer (w/ Colors!)

Example of a loan and deposit transfer. Coloring of cells inspired by commenter Geoff at pragcap.com (an attempt to make it more clear, by matching assets with their related liabilities across balance sheets). Otherwise this is exactly the same as Example #1. Each color represents a financial entity: loan, deposit, etc. Cells with the same color represent two views of the same entity, one from the creditor's viewpoint (left hand column) and one from the debtor's viewpoint (right hand column). Example #10 demonstrates how these different financial entities are interrelated but have a degree of independence from one another.

Setup: one central bank (CB), two commercial banks A and B, and one person x. No reserve requirements or capital requirements and everyone's balance sheet initially clear (empty).


Initial balance sheets (for CB, A, B, and x):

CB, A, B, x
Assets Liabilities
$0 $0


Balance sheets after x takes a $100 loan from A:

Bank A
Assets Liabilities
$100 loan to x $100 deposit for x

Person x
Assets Liabilities
$100 deposit at A $100 borrowing from A


Balance sheets after x transfers deposit from Bank A to Bank B:

Central Bank
Assets Liabilities
$100 reserve overdraft for A $100 reserve deposit for B

Bank A
Assets Liabilities
$100 loan to x $100 overdraft at CB

Bank B
Assets Liabilities
$100 reserves $100 deposit for x

Person x
Assets Liabilities
$100 deposit at B $100 borrowing from A


Balance sheet after Bank A borrows $100 of reserves from Bank B and repays CB the overdraft amount by the end of the day (note: Bank A could have borrowed from any other bank, the money markets, the Central Bank's discount window or by attracting transfer deposits, but I've chosen to show the case where it borrows from Bank B):

Central Bank
Assets Liabilities
$0 $0

Bank A
Assets Liabilities
$100 loan to x $100 reserve borrowings from B

Bank B
Assets Liabilities
$100 loan of reserves to A $100 deposit for x

Person x
Assets Liabilities
$100 deposit at B $100 borrowing from A


Note that at the end, the central bank's balance sheet is again clear, yet there are $100 of reserves on loan to A from B. To see a similar case where the deposit transfer is accomplished with a purchase instead, see Example 1.1.

I recommend this writeup on the monetary system by Cullen Roche for more information. Also, I must credit this article. Also, this site animates balance sheets, and has an especially good macro page with consolidated balance sheets.  Look at this to see this same example with reserve requirements, and here to see it with both reserve and capital requirements.

42 comments:

  1. you’ve made some good points there. it’s a good idea !

    ReplyDelete
  2. Each color represents a financial entity: loan, deposit, etc. Cells with the same color represent two views of the same entity, GetSomeDosh

    ReplyDelete
  3. Each color represents a financial entity: loan, deposit, etc. Cells with the same color represent two views of the same entity, faxless online pay day loans canada

    ReplyDelete
  4. Once you make a loan, you will be able to post a comment on the lending page, and that will be sent via SMS to the borrower.låna pengar

    ReplyDelete
  5. If you set the annuity switch to 0 or you omit the argument, Excel assumes payments occur at the end of the period following the ordinary annuity convention. free-credit-report.net

    ReplyDelete
  6. I see the greatest contents on your blog and I extremely love reading them. online payday loan

    ReplyDelete
  7. Thank you so much!!! I' am currently a real estate and finance graduate student. Your post and your instructions are so easy to follow. You have simplified so many formulas to calculate payments, interest, principal paid to date etc... Into straight to the point illustration and table! I don't know why they don't teach this in school first then the formulas and theory as supplemental lectures... Thanks once again, I was doing all these step by step on paper :) buy perfect money e-voucher online with credit card

    ReplyDelete
  8. Two commercial banks, A and B, and two people, x and y. Reserve requirements are 10% of deposits, but there are no capital requirements. Person x banks at A and person y banks cpa torrance ca

    ReplyDelete
  9. Many thanks for the exciting blog posting! Simply put your blog post to my favorite blog list and will look forward for additional updates. Simply wanted to write down a word in order to say thanks to you for those wonderful tips. no guarantor loans

    ReplyDelete
  10. This is really interesting, I love reading information about money and finances. I have found some interesting information about trading, you may want to visit the site.

    ReplyDelete
  11. Great blog, money and finance articles can be hard to understand but I have found some good information about trading and Elite Forex Trading is a good site to check.

    ReplyDelete
  12. "We are the prime housing finance institution of the country, providing affordable housing solutions to low and middle income groups." ...

    ReplyDelete
  13. This is really interesting. As the color code is used to represent various loan aspects and liabilities it is easy to understand. Title loan can be availed using simple documentation process and can meet emergency cash needs. See cash for title

    ReplyDelete
  14. Read your post its really informative and helpful. Keep Updating with newer post on Home Loan Balance Transfer

    ReplyDelete
  15. This is my first time i visit here and I found so many interesting stuff in your blog especially it's discussion, thank you.
    www.loanmoney.com.sg

    ReplyDelete
  16. Very educating story, saved your site for hopes to read more!
    loanmoney.com.sg

    ReplyDelete

  17. Hey, Wow all the posts are very informative for the people who visit this site.Good work!We also have a Blog.Please feel free to visit our site. Thank you for sharing.
    Buy perfect money e-voucher online
    Keep Posting:)

    ReplyDelete
  18. Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. http://www.slickcashloan.com

    ReplyDelete
  19. I really like your take on the issue. I now have a clear idea on what this matter is all about.. http://www.slickcashloan.com/

    ReplyDelete
  20. thank you for inovative article, very nice article, don't forget to visit my own website, http://saktiqq.net/

    thank you for inovative article, very nice article, don't forget to visit my own website, http://saktiqq.net/

    SAKTIQQ
    AGEN DOMINO
    BANDAR POKER
    BANDAR SAKONG
    DOMINOQQ ONLINE
    SAKONG
    TEMBAK IKAN

    ReplyDelete
  21. Very useful post. This is my first time i visit here. I found so many interesting stuff in your blog especially its discussion. Really its great article. Keep it up. visit slickcashloan today

    ReplyDelete
  22. Installment loans give you just the money you need to get out of financial jams that arise when you least expect them. click over here

    ReplyDelete
  23. Thanks for posting this info. I just want to let you know that I just check out your site and I find it very interesting and informative. I can't wait to read lots of your posts. loans on inheritance

    ReplyDelete
  24. Very useful post. This is my first time i visit here. I found so many interesting stuff in your blog especially its discussion. Really its great article. Keep it up. check slickcashloan.com today

    ReplyDelete
  25. This is a great inspiring article.I am pretty much pleased with your good work.You put really very helpful information. Keep it up. Keep blogging. Looking to reading your next post. moneytrumpet.co.uk

    ReplyDelete
  26. I really appreciate the kind of topics you post here. Thanks for sharing us a great information that is actually helpful. Good day!Free Mockup

    ReplyDelete