Do banks create money or just credit? - Banking 101 (Part 5 of 6)

Summary

The video explores the distinction between money and credit, arguing that the numbers in bank accounts are indeed money, not merely credit. It highlights the role of government guarantees, such as the Financial Services Compensation Scheme, which remove credit risk associated with bank deposits. By asserting that these deposits are fully backed by taxpayer support, the video posits that bank-created money is as secure as cash from the central bank. Ultimately, it critiques the view that banks don't create money, suggesting this perspective serves to preserve governmental control over monetary policy.

Takeaways

• 😀 Banks create money, not just credit, contrary to some beliefs.
• 😀 Credit involves risk; if banks only created credit, deposits would be risky.
• 😀 The numbers in your bank account are essentially a promise from the bank.
• 😀 Cash is considered risk-free as it is backed by the central bank and government.
• 😀 The Financial Services Compensation Scheme (FSCS) provides a safety net for bank deposits.
• 😀 Taxpayer money may be used to cover losses if banks can't repay depositors.
• 😀 Government backing transforms bank credit into a risk-free form of money.
• 😀 The risk of losing deposits is mitigated by government guarantees.
• 😀 Bank deposits are as secure as cash notes from the Bank of England.
• 😀 Acknowledging that banks create money raises serious regulatory implications.

Q & A

What is the primary argument about the nature of money and credit presented in the script?

The script argues that the numbers banks create in customers' accounts are actually money, not just credit, because they are backed by government guarantees.

What is credit risk and how does it relate to bank deposits?

Credit risk is the risk that a borrower will not repay their debt. In the context of bank deposits, if the numbers in an account were merely credit, there would be a risk that the bank might not repay depositors.

What distinction does the Bank of England make regarding types of money?

The Bank of England distinguishes between cash (central bank money with no credit risk) and bank-created money, which involves some risk unless guaranteed by the government.

How does the Financial Services Compensation Scheme (FSCS) change the perception of bank deposits?

The FSCS guarantees depositors up to £85,000, effectively removing the credit risk associated with bank deposits and suggesting that these deposits are safe and backed by the government.

Why do some officials argue that banks do not create money?

Some officials argue that acknowledging banks' ability to create money would raise concerns about giving significant monetary powers to private corporations, which might have implications for economic stability.

What is the implication of government backing on bank deposits?

Government backing implies that the deposits in banks are as safe as cash created by the central bank, converting what could be risky credit into a risk-free form of money.

What historical examples are mentioned to illustrate bank risk?

The script references Northern Rock, Wachovia, and Icelandic banks to demonstrate instances where banks faced insolvency and could not repay depositors.

How does the script redefine the understanding of bank-created money?

The script redefines bank-created money as equivalent to cash in terms of risk due to the government’s guarantee, arguing that both forms of money are fundamentally safe.

What are the consequences of treating bank deposits as merely credit?

If bank deposits were seen as mere credit, depositors would face a potential risk of losing their money, fundamentally altering how people interact with banks.

What role do taxpayers play in the Financial Services Compensation Scheme?

If the contributions from banks to the FSCS are insufficient, taxpayers may have to cover the shortfall, thus indirectly supporting bank deposits and maintaining depositor confidence.