Banks are Not Intermediaries of Loanable Funds – And Why This Matters

61 Pages Posted: 31 May 2015

Date Written: May 29, 2015

Abstract

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

Jakab, Zoltan and Kumhof, Michael, Banks are Not Intermediaries of Loanable Funds – And Why This Matters (May 29, 2015). Bank of England Working Paper No. 529, Available at SSRN: https://ssrn.com/abstract=2612050 or http://dx.doi.org/10.2139/ssrn.2612050

Zoltan Jakab

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Michael Kumhof (Contact Author)

CEPR ( email )

London
United Kingdom

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