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Banks are not intermediaries of loanable funds – and why this matters

Zoltán Jakab () and Michael Kumhof ()

No 529, Bank of England working papers from Bank of England

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 (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2015-05-29
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-mac and nep-mon
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