Why Are Banks Not Lending

Why Are Banks Not Lending – Banks and insurance companies are both financial institutions, but they don’t have as much in common as you might think. Although they have some similarities, their processes are based on different models, which creates notable contrasts between them.

While banks are subject to federal and state supervision and have received increased scrutiny since the financial crisis that led to the 2007 Dodd-Frank Act, insurance companies are regulated only at the state level. Various parties have called for federal regulation of insurance companies. Especially since American International Group, Inc. (AIG) played a major role in the crisis.

Why Are Banks Not Lending

The Dodd-Frank Wall Street Reform and Consumer Protection Act passed by the Obama administration in 2010 created new government agencies responsible for regulating the banking system. President Trump promised to repeal Dodd-Frank, and in May 2018 the House of Representatives voted to repeal aspects of the law.

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Both banks and insurance companies are financial intermediaries. However, their functions are different. An insurance company protects its customers from certain risks, such as a car accident or a home fire. In return for this insurance, their clients pay them regular insurance premiums.

Insurance companies manage these premiums by making appropriate investments and thus also act as a financial intermediary between customers and the channels that receive their money. For example, insurance companies may channel money into investments such as commercial real estate and bonds.

Insurance companies invest and manage the money they receive from their clients for their own benefit. Their work does not create money in the financial system.

Doing it differently, the bank accepts deposits and pays interest for using them, then turns around and lends the money to borrowers, who usually pay higher rates of interest. So the bank makes money from the difference between the interest rate it pays you and the interest rate it charges borrowers. It actually performs the role of financial intermediary between the depositors who put their money in the bank and the investors who need this money.

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Banks use their customers’ deposits to create a larger loan base, thus creating money. Because depositors require only a portion of their deposits each day, banks keep only a portion of these deposits in reserve and lend the remaining deposits to others.

Banks accept short-term deposits and offer long-term loans. This means that there is a mismatch between their liabilities and their assets. If many depositors want their money back, as is the case in a bank-run scenario, they may find the money in a hurry.

However, for the insurance company, its obligations are based on the occurrence of certain insured events. Their clients can receive payments in the event of an insured event, such as a house fire. Otherwise they have no claim to the insurance company.

Insurance companies seek to invest the premium money they receive so that they can meet their obligations as they arise.

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Although it is possible to cash out some insurance policies early, it depends on the needs of the individual. As in the case of running banks, it is unlikely that many people will want to get their money in one go. This means that insurance companies are in a better position to manage their risks.

Another difference between banks and insurance companies is the nature of their systemic relationships. Banks operate as part of the wider banking system and have access to a central payment and clearing institution that links them together. This means that systemic infections can spread from one bank to another due to this type of interconnectedness. US banks also have access to the central banking system and its funds and are backed by the Federal Reserve.

However, insurance companies are not part of a central clearing and payment system. This means that banks are not subject to systemic infection. However, they do not have a lender of last resort like the Federal Reserve servicing the banking system.

There are risks related to interest rates and regulatory oversight that affect both insurance companies and banks, albeit in different ways.

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Changes in interest rates affect all financial institutions. Banks and insurance companies are no exception. Given that the bank pays a competitive rate of interest to its depositors, it may have to raise interest rates if economic conditions warrant. Generally, this risk is reduced because the bank can charge a higher interest rate for its loans. Changes in interest rates can also negatively affect the value of a bank’s investments.

Insurance companies are also exposed to interest rate risk. Because they invest their premium money in different investments, such as bonds and real estate, when interest rates go up, they may see the value of their investment go down. And in times of low interest rates, they run the risk of not getting enough return on their investment to pay policyholders when claims come in.

Banks and insurance companies in the United States are subject to various regulatory bodies. National banks and their affiliates are regulated by the Office of the Comptroller of the Currency (OCC).

In the case of state approved banks, they are regulated by the Federal Reserve Board for banks that are members of the Federal Reserve System. As for other banks chartered from the state, they are under the jurisdiction of the Federal Deposit Insurance Corporation, which insures them. Several state bank regulators also supervise state banks.

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However, insurance companies are not subject to federal regulations. Instead, it is under the jurisdiction of several state surety associations in all fifty states. When an insurance company fails, the state guarantor company collects money from other insurers in the state to pay the policyholders of the failing company.

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According to a survey by City AM on behalf of Sovereign Money advocating Positive Money, 84% of UK lawmakers don’t know that banks create money when they lend. This is despite the fact that in 2014 the Bank of England issued a clear statement to that effect.

How is money created? Some are set up by the state, but mostly for financial emergencies. For example, the crash led to quantitative easing – money that the government pumped directly into the economy. Most of the money (97%) comes from commercial bank lending. At the same time, 27% of bank credit goes to other financial institutions; 50% for the mortgage (especially for existing housing); 8% on expensive credit (including overdrafts and credit cards); And only 15% for non-financial companies, that is, for the industrial economy.

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This paragraph refers to the Bank of England’s exact statement above. Unfortunately, Zoya did not understand this. If that was the case, why would he say:

Is there a magic money tree? All money comes from the magic tree because money comes out of thin air. There is no gold standard. Banks do not operate on a money multiplier model where they lend as multiples of the deposits they hold. Money is only created on the basis of faith, whether that be faith in ever-increasing house prices or any other committed investment. This does not mean that creation is without risk: any government can create too much and cause hyperinflation. Any commercial bank can create excess debt and create excess debt in the private economy, which is what happened. But this means that the money has no inherent value, it is just a token of trust between the lender and the borrower. Therefore, it is the most important resource for democracy. The argument against social investment in education, welfare and public services, because there is no magic money tree that can’t be bought, is meaningless. It all comes from the tree. The real question is who is responsible for the tree?

First of all, it is completely wrong to say that money “ran out of the blue.” is not it. In fact, Zooey herself did not say it in the previous paragraph. Money is created when banks make loans. The rules of double entry accounting state that when banks create a new loan principal, they must also create an equal and opposite liability in the form of a new demand deposit. These demand deposits, like all other customer deposits, are included in the vast money supply of central banks. In this sense, when banks make loans, they create money. But this money is by no means “out of thin air”. This is provided by a completely new asset – credit. Zoe completely refuses to support fiduciary assets

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