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Walk a protest against the banking system which of course has already created a group on Facebook, December 7: Day of protest banks across Europe . Basically consists of removing the funds as clients have deposited in banks in which we are customers. I've read several blogs and a brief introduction that sets out in the group and not clear to me why which organizes the event. Personally I think there are two reasons totally incompatible with each other: the first is a critique of fractional-reserve system, the second disaster drawer where basically meet those who want to stop the system without more. To all this must be added a general lack of knowledge of how the mechanisms of monetary policy of central banks, fiscal policies and the actual state with fractional reserve banking.
Dealing with all these issues here would a post worthy of a book, so I will focus mainly on criticizing the fractional system, because I will pass explain the operation of monetary policy.
The current banking system operates under what economists call fractional reserve. This means that banks are only required to keep on hand a part of all the money their customers have deposited in them is what is known as the technical reserve requirements, a legal share in the monetary union marked by Central Bank and U.S. Federal Reserve. Currently this ratio is 2%.
To better explain, if a bank has in its coffers € 100, under the law of the minimum reserves can provide save only € 98 and € 2. What is legally available to those Euros? As provided in the form of credits, loans, etc. What does that? Generate additional money (money held by the public and bank deposits), which is technically called the money multiplier. It provides funding from the creation of companies to buy our house. Because the role of banks is the intermediary, ie, to communicate those with financial capacity to those with financial needs. And where they keep the 2% the banks? For in the various Central Banks on their part. In the case of Spain in the European Central Bank.
hope you have been able to clearly explain these concepts and the initial situation, I can enter and to detail what is known as monetary policy. Central banks have a simple and basic three tools to carry out its operations in the money market. Market operations open mainly based on modifying the official interest rate money and standing facilities, the cash ratio.
The instrument used has long been the central rate of interest, which is to mark the minimum interest rate which the central bank will stop lending money to various banks participating in the system. This means that if a bank like Capital SA needs to ask € 1,000 million to BC and the rate rises from 1.2% to 1.25% this means that you'll pay more and perhaps financed decide not to attend this auction and reorganize its business, may grant make fewer loans and interest rates to their customers more expensive.
Currently, central banks are operating in the market with extraordinary measures such as buying debt, which means nothing more than financing the government so it can continue its pace of spending. This operation was prohibited by the law regulating the operation of central banks and it has been necessary to modify the rules to allow this operation.
Is it advantageous for central banks such operations? Of course, now the main funding mechanisms are very expensive as the case of interbank market (the system where different banks lend money to each other), because no one trusts his neighbor. And even though central banks are taking huge financial facilities, banks require guarantees and as such offer the same debt purchasing and central bankers have decided to accept. Basically this is money leaving the state to pay an interest rate of 2% for example, going to the Central Bank and borrow money at 1% and leave change to guarantee the payment of public debt in exchange the bank earns differential, ie, 1%.
Looking for spoil banks to the States? No, because it would go against their interests, and that would collect outstanding debts and guarantees frete Central Bank would have no value. Furthermore, in an interconnected system as a case of this type would be a domino collapse of all stakeholders and a disaster for the world economy.
banks and central banks? Depends on debt are talking about. If it is private debt, it is clear that this has been part of their business and their role. If we talk about public debt or state, we have seen that your purchase was prohibited by the Central Banks and therefore only the banks could buy this type of instrument Financial.
-debt Is the main goal of the banking system? No, because the banking business consists of two legs, the assets and liabilities. By assets we mean the loans or credit from other banking products, money deposited by liabilities in the accounts of customers. And between the two entities must be a balance that closely monitored the international rules of the Bank for International Settlements in Basel BIS regulations I, II and now III. To be able to leave money, banks should not have many assets on its balance sheet, so if you are heavily indebted, will come a point where one of the ways to make money is depleted.
hope I have explained certain concepts on the functioning of the banking system within the financial system and the use of monetary policy and its instruments. In the next post I will discuss the opinion that to me, means to operate under a fractional reserve system and of course, to answer the questions and concerns that reading this entry exist.
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