Christopher Kent — Coin – Born Of Credit?

As I mentioned earlier, the vast mass of wide coin consists of depository fiscal establishment deposits. These banking liabilities are created when an Australian identify or line of piece of occupation organization has funds credited to their deposit line of piece of occupation organization human relationship at an Australian bank. One way this tin occur, for example, is when a line of piece of occupation organization deposits currency it has earned alongside its bank. Again, such transactions add together to deposits but exercise non create coin because the depository fiscal establishment client is exactly exchanging 1 type of coin (currency) for around other (a deposit).

Money tin move created, however, when fiscal intermediaries brand loans. Accordingly, the concepts of coin in addition to credit are closely linked inwards a modern economy, albeit non 1 for one. When a depository fiscal establishment extends a loan, it makes coin available to the borrower, for example, to purchase a car, a line of piece of occupation solid or equipment for a business. The depository fiscal establishment may credit the deposit line of piece of occupation organization human relationship of the borrower, who withdraws the funds to brand their purchase. Alternatively, the depository fiscal establishment may guide credit the deposit line of piece of occupation organization human relationship of the seller on behalf of the borrower. In either case, the loaned funds volition tend to discovery their way into a deposit somewhere inwards the banking system. This procedure adds to the render of money.

If I stopped here, you lot mightiness move left alongside the impression that the procedure of lending allows the banking organization to create endless quantities of coin at no cost. However, the procedure of coin creation is constrained inwards numerous ways in addition to depends on the demeanor of borrowers, banks in addition to regulators, also every bit the opinion of monetary policy....

His accounting gets somewhat funky.

A unmarried depository fiscal establishment may brand loans past times drawing on its liquid assets, yet non have the corresponding deposits created inwards return. Before extending farther loans, that depository fiscal establishment would need to enhance funds inwards other ways – for example, past times issuing debt or equity securities or past times waiting for its deposits in addition to liquid assets to ascent via other means.

Customer deposits are depository fiscal establishment liabilities, non assets.

Reserve Bank of Australia

Money – Born of Credit?

Christopher Kent | Assistant Governor (Financial Markets)
Remarks at the Reserve Bank's Topical Talks Event for Educators
Sydney – xix September 2018