The “accounting view” of money: money as equity (Part II)

Partially I from the blog, we discussed the implications within our recommended “Accounting View” of money since it relates to legal tender. In this particular part and subsequently, we discuss the implications in the new approach, with specific reference to the commercial bank money.

Bank deposits and central bank reserves

After extended like a tenet of publish-Keynesian theories of money,1 even mainstream overall costs has finally recognized that commercial banks aren’t simple intermediaries of old money they have produced their particular money by issuing liabilities by way of sight deposits (McLeay, Radia, and Thomas 2014).2

If banks create money, they don’t have to raise deposits to lend or sell (Werner 2014). Still, they need to take advantage in the cash and reserves necessary to guarantee cash withdrawals from clients and settle obligations along with other banks emanating from client instructions to mobilize deposits to produce payments and transfers.

The right payment orders are simply individuals between clients of numerous banks, since the settlement of payments between clients of the bank (“on us” payments) does not need using reserves and happens simply by debiting and crediting accounts held round the books in the bank.

For the money withdrawals and interbank payments, every bank must determine the right amount of cash and reserves needed to pay for deposits. These contain:

  • Cash reserves and reserves deposited while using central bank
  • Reserves from settlement of incoming payments off their banks
  • Borrowings within the interbank market
  • Borrowings within the central bank
  • Immediate liquidation of unencumbered assets inside the balance sheet

New deposits of cash from old and new clients (since new, noncash deposits from clients is only able to contain deposits transferred off their banks, that can come under item ii).

Debt or what?

Commercial bank money can be a debt liability for deposit-issuing banks, since they’re under obligation to change deposits into cash if needed utilizing their clients and settle payments in central bank reserves in those days required by payment system settlement rules.

However, in the fractional reserve regime, banks hold only a part of reserves against their total deposit liabilities. The amount of reserves they’ll use for settling interbank obligations really are a fraction in the total transactions settled.

The higher limited is applying cash throughout the market, as well as the bigger will be the economies of scale in making use of reserves (as permitted by payment system rules and clients’ nonsimultaneous mobilization of deposits), the reduced is the amount of reserves that banks have to profit the issuance of latest deposits.3

Payment system rules affect using reserves via two channels: the settlement modality (that’s, netting or gross settlement) as well as the technology adopted. Modern technologies introduce facets of netting into gross settlement processes while growing the speed of circulation of reserves, therefore allowing banks to invest less on making use of reserves for almost any given volume and price of payments settled.

Inside the hypothetical situation from the fully consolidated banking system in the cashless economy where all agent accounts sit with simply one bank, all payments and transfers might be “here” for your bank. The lending company want no reserves for settling transactions and is under no debt obligation towards the clients. It might produce the money the economy could absorb without holding reserves, which is money would have the identical power as legal profit settling all obligations.

What’s bank money?

In solid-world economies, however, you’ll find multiple banks whose payment activities generate interbank settlement obligations. Yet, the fractional reserve regime as well as the economies of scale allowed with the payment system and depositors’ behavior decrease the reserves essential for banks to back their obligations. Under growing scale economies, banks could make more liabilities (by lending or selling deposits) with decreasing reserve margins for coverage. Within the hypothetical situation above which discussion, as a result, anything else equal, an even more consolidated banking system affords lower coverage of the liabilities (at less costly) when compared to a less concentrated one.

More generally, absent adverse economic or market contingencies inducing depositors to change deposits into cash, the liabilities symbolized by deposits only partly constitute debt liabilities in the issuing bank, which consequently require reserve coverage. All of those other part of the liabilities is definitely an origin of earnings for your issuing bank-earnings that comes from the bank’s ability to create money. In accounting terms, for the extent this earnings is undistributed, it is equivalent to equity (as discussed partially I from the blog).

Partially III in the blog, we show the double nature of economic bank (sight) deposits is similar to the concepts of general accounting.


Graziani, A. 2003. The Financial Theory of Production. Cambridge, Uk: Cambridge College Press.

McLeay, M., A. Radia, and R. Thomas. 2014. “Money Creation in the present Economy.” Bank of England Quarterly Bulletin 54 (1): 14-27.

Moore, B. 1979. “The Endogenous Money Stock.” Journal of Publish Keynesian Overall costs 2 (1): 49-70.

—. 1983. “Unpacking the Publish Keynesian Black Box: Bank Lending as well as the Money Supply.” Journal of Publish Keynesian Overall costs 5 (4): 537-56.

Werner, R. A. 2014. “How Do Banks Create Money, and Why Can Other Firms Not Carry out the Same? Grounds for your Coexistence of Lending and Deposit-Taking.” Worldwide Summary of Financial Analysis 36: 71-77.


1 See, for instance, Moore (1979, 1983) as well as the literature on financial circuit theory. Since this is too vast to get reported here and do justice towards the many contributors, we refer only to the task by Graziani (2003), one of the theory’s most authoritative exponents.

2 Banks create money by lending or selling deposits. Lending deposits features very close analogies to selling deposits. As banks issue deposits to clients to acquire money, banks become proprietors in the money received and obtain the legal legal rights for doing things no matter what they need (prone to existing laws and regulations and rules and rules). Even if banks are restricted in making use of money-for instance, for instance, inside the situation of regulation prescribing the sorts of assets to get held-they (and never the depositors) will be the proprietors in the purchased assets and so they (and never the depositors) will be the proprietors in the earnings generated with the purchased assets.

3 For implementing cash, in situations where the financial authority declares deposit inconvertibility and prohibits deposit transfers across borders, bank money effectively replicates central bank money, whereby reserves cannot circulate in the central bank’s books: any single commercial bank may dispossess itself that belongs to them reserves (if another banks demand them), however these cannot altogether accomplish this, since reserves once created remain outstanding until they are compensated or provided to the central bank.

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