Money creation by credit institutions under the law: A response to Werner

70 Pages Posted: 28 Mar 2022 Last revised: 18 May 2023

Date Written: February 19, 2022


Underpinning the post-crisis consensus on money creation (the “bank loans create deposits” thesis) is Werner’s explanatory account, according to which banks are able to do this by virtue of their being exempt from the law prohibiting firms from receiving client funds and holding them “in deposit”, known in the UK as the ‘client money rules’ and detailed in the FCA’s Client Asset Sourcebook (CASS). Though in my view partial and at times equivocal, Werner’s explanation contains a plethora of valuable insights which, as I show, can be combined with other regulations to fully explain – or so I claim – not only credit institutions’ capacity to create sight deposits in excess of the funds received from depositors (as well as the willingness of the latter to accept such tender), but also the incapacity of e-money institutions (EMIs) to create e-money in excess of the funds received from e-money holders, as well as the incapacity of central securities depositories (CSDs) to create balances in securities accounts in excess of the securities received from investors.

Keywords: Segregation, trust, client money, client money rules, custodian, CASS, money creation

JEL Classification: K22, E42, E51, G21, G28, L51, M41

Suggested Citation

Clavero, Borja, Money creation by credit institutions under the law: A response to Werner (February 19, 2022). Available at SSRN: or

Borja Clavero (Contact Author)

University of Winchester ( email )

United Kingdom

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