In order to deconstruct banking, we begin with the term deposit. Do banks take ‘deposits’? No

Prof Sashi Sivramkrishna in this MC article deconstructs banking.

In order to deconstruct banking, we begin with the term deposit. Do banks take ‘deposits’? No. The word deposit taken from the Roman law depositum implies bailment. In other words, a deposit would mean that the bailor (depositor) transfers physical possession of the property (money) for a period of time and for a specific purpose to the bailee (bank), but retains ownership. 

…..

The other side of the bank’s operations — ‘lending’ — is also significant. To lend something implies two essential conditions: that it already exists and that something is actually transferred from someone to someone else or some other entity. In an extraordinary empirical study of actual transactions recorded by a bank when he actually took a loan, Richard Werner found that the bank did not ‘lend’ money. The bank created money ‘ex nihilo’ or out of nothing.

…..

Some heterodox economists such as Werner, therefore, argue that stricter control over direction of credit as well as a decentralised banking sector that is more responsive to the needs of small and medium industries may be required to increase real capital investment and employment opportunities.

The success of economies like Germany, Japan, Taiwan, South Korea and more recently, China, can be understood only with an appreciation of the essence of banking, namely, its dominance over the creation of money in a modern economy and the need to exercise appropriate control over it.

More in the piece…

Scotland after Sterling..

Barry Eichengreen in this Proj Syndicate article:

Scottish advocates of leaving the United Kingdom need a plan for a new currency and an independent central bank, as well as a blueprint for the country’s subsequent transition to the euro. These would go a long way toward reassuring Scots who yearn for independence but worry about what follows sterling.

All kinds of exits happening and waiting to happen…

Historical Data: Where to Find Them, How to Use Them

Paola Giuliano and Andrea Matranga in this NBER WP:

The use of historical data has become a standard tool in economics, serving three main purposes: to examine the influence of the past on current economic outcomes; to use unique natural experiments to test modern economic theories; and to use modern economic theories to refine our understanding of important historical events. In this chapter, we provide a comprehensive analysis of the types of historical data most commonly used in economic research and discuss a variety of issues that they raise, such as the constant change in national and administrative borders; the reshuffling of ethnic groups due to migration, colonialism, natural disasters, and many other forces. We also point out which methodological advances allow economists to overcome or minimize these problems.

 

Bank Capital and Monetary Policy Transmission in India

Silu Muduli and Harendra Behara in this new RBI working paper:

This paper examines the role of bank capital in monetary policy transmission in India during the post-global financial crisis period. Empirical results show that banks with higher capital to risk-weighted assets ratio (CRAR) raise funds at a lower cost. Additionally, banks with higher CRAR transmit monetary policy
impulses smoothly, while stressed assets in the banking sector hinder transmission. Recapitalization to raise CRAR can improve transmission; however, CRAR above a certain threshold level may not help as the sensitivity of loan growth to monetary policy rate reduces for banks with CRAR above the threshold. Therefore, it can be concluded that monetary policy can influence credit supply of banks depending on their capital position.