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Banks are not intermediaries of loanable funds — facts, theory and evidence

Zoltán Jakab () and Michael Kumhof ()

No 761, Bank of England working papers from Bank of England

Abstract: In the loanable funds model, banks are modelled as resource-trading intermediaries that receive deposits of physical resources from savers before lending them to borrowers. In the financing model, banks are modelled as financial intermediaries whose loans are funded by ex-nihilo creation of ledger-entry deposits that facilitate payments among nonbanks. The financing model predicts larger and faster changes in bank lending and greater real effects of financial shocks. Aggregate bank balance sheets exhibit very high volatility, as predicted by financing models. Alternative explanations of volatility in physical savings, net securities purchases or asset valuations have almost no support in the data.

Keywords: Banks; financial intermediation; loanable funds; money creation; bank lending; bank financing; money demand. (search for similar items in EconPapers)
JEL-codes: E41 E44 E51 G21 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2018-10-26, Revised 2020-01-17
New Economics Papers: this item is included in nep-ban, nep-mac and nep-pay
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