The wisdom of Vaidas Urba

This is excellent:

A lot of confusion results from the fact that both the availability of capital and the availability of reserves are constraints on banking. However, the nature of these constraints is different. The availability of capital is a real constraint that determines the real size of the banking industry (the ratio of nominal bank assets to nominal GDP). The availability of reserves is a nominal constraint that determines the nominal GDP.

There are many people who don’t seem to be able to grasp this distinction.



7 Responses to “The wisdom of Vaidas Urba”

  1. Gravatar of multinonde multinonde
    18. December 2013 at 14:05

    Could you comment on the fact that some countries have only capital requirements and no reserve requirements(Canada for example)?
    How does such a system function?

  2. Gravatar of ssumner ssumner
    18. December 2013 at 15:50

    Reserve requirements are not really needed. Banks will want to hold some reserves so that they have funds when customers wish to withdraw cash. Also to make interbank transfers.

  3. Gravatar of Dustin Dustin
    18. December 2013 at 18:26

    This makes perfect sense, and isn’t that still consistent with reserves being a form of capital?

  4. Gravatar of ssumner ssumner
    19. December 2013 at 08:55

    Dustin, They are, but so are T-bills. So capital is a better measure of the safety of banks than just reserves.

  5. Gravatar of Andy Andy
    19. December 2013 at 11:55

    Reserves and t-bills are both assets. Capital is a variant of equity and is measured on the other side of the balance sheet.

  6. Gravatar of ssumner ssumner
    19. December 2013 at 20:03

    Andy, I’m afraid I’ve forgotten the details of capital regs. Don’t they discriminate between certain classes of safe assets, and other assets? Or is my memory off on that point?

  7. Gravatar of Dustin Dustin
    20. December 2013 at 04:14

    I understood that reserves and Tbills are liabilities but as an asset form part of the capital ratio. Not the case?

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