Banks are Not Intermediaries of Loanable Funds – And Why This Matters
61 Pages Posted: 31 May 2015
Date Written: May 29, 2015
In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy.
Keywords: Banks, financial intermediation, loanable funds, money creation, loans, deposits, leverage, spreads
JEL Classification: E44, E52, G21
Suggested Citation: Suggested Citation