Disagrees with ‘ODT’ editorial

YOUR editorial (ODT, 10.2.17) recommends that a ‘‘Monetary policy rethink is necessary’’ — not least by the writer of the editorial, I suggest. We are told that ‘‘retail banks have been forced to borrow more money from their customers’’, the implication being that banks are simply intermediaries, which use the savings of depositors, which they on-lend to borrowers and make their profit from the interest margins.

The Bank of England, which ought to know, said in its Spring Bulletin in 2014, that the banks create money whenever a loan is entered into a borrower’s bank account. This means that banks don’t have to borrow money at all. Deposits are not needed to generate loans. To the contrary, creating a loan from nothing generates more deposits.

The ODT gets this consistently wrong and needs to update its thinking. Dennis Dorney

Calton Hill [Regulatory pressure compelled banks to adopt more stable sources of funding following the global financial crisis. The Reserve Bank imposed minimum quantitative ratios for liquidity risk on a number of locallyincorporated banks with effect from April 1, 2010. The minimum Core Funding Ratio (CFR) was initially set at 65% but the Reserve Bank also clearly stated its intention to raise it in two steps to 75% by July 2012, subject to further analysis and prevailing market conditions.

On November 10, 2011 the Reserve Bank announced a sixmonth deferment until January 2013, in the next step up to 75%. The decision took account of funding market conditions at the time. Core funding includes tier one capital, the majority of retail deposits, all wholesale funding and half of wholesale debt funding with a maturity of between six months and one year. — Ed]

BIBLE READING: By awesome deeds, You answer us with deliverance. — Psalms 65.5.