100% Mortgages?

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  • 100% Mortgages?
  • pjt201 said

    pjt201 – Member
    rightplacerighttime – Member

    I've said this here before (and I don't mind if someone (preferably someone other than Stoner) wants to explain why I've got it wrong as I can hardly believe it myself) but BANKS DO NOT NEED TO TAKE DEPOSITS IN ORDER TO LEND MONEY – they just create a loan and at the same time, write down the amount they have lent as an asset on their books. The reason they won't lend though, is because there is no longer a market for those assets (debts) so they can't resell them and take a profit without taking a corresponding risk.

    Well, there's nothing stopping banks just giving away money either but they don't. It's all about perceptions of risk and given the beating that banks have had recently from risky lending they're perceiving a much higher level at the moment than they were. The deposit reduces the risk to them.

    Sorry, I think I may have muddied the waters there. I'm not talking about the deposit that the person buying the house has to make – clearly the more they (the buyers) put into the property, the less risk for the bank.

    I was talking about the banks not having to take in deposits from savers in order to be able to lend money out. The amazing thing is that BANKS DON'T NEED TO HAVE PEOPLE SAVING >= AMOUNTS TO WHAT THEY LEND OUT – THEY CAN LEND MONEY THEY DON"T HAVE!

    barca
    Member

    Thank you for your reply. Your opinion is much appreciated Scott TB.

    Premier Icon Scott TB
    Subscriber

    "What about the practice of fractional reserve banking?

    How come so many people (I'm not having a dig BTW this is a genuine question) who seem to understand other aspects of the economy much better than me don't realise the effect of this? Am I missing something?"

    This is a touch confused because we've strayed out of Mortgages and into Deposit Taking. Basically a lender cannot lend money it doesn't have – if you are lending someone £100,000 you need to have £100,000 to give them, this money comes from deposits made in the form of savings.

    Now savings can be withdrawn at any time – so fractional reserve banking is basically saying that if someone deposits £20,000 with you, you don't have to stick it all in a safe place until they need it. You can invest the majority (in the form of lending to others) as long as you keep a fraction in reserve in case they walk in and want to withdraw some – so if a bank has deposits of say £1bn they'll lend out 75% and keep 25% in reserve to cover withdrawals.

    The problem can arise, which is called "a run on a bank" where so many people want to withdraw so much that the reserves can't cover the demand and the invested money can't be turned in to cash quick enough – which was the situation with Northern Rock.

    Hope that helps…!?!

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