Neil Wilson — Banks: Reserves sorted. Now lets talk capital

Neil presses on into new territory after the debate over reserves. Banks don't lend reserves; they risk capital. There is no reserve constraint under the present system; however, there is a capital constraint. For example there are complex regulations (Basel II, III) constraining the risk banks are allowed to take against their capital. There is a required loan/capital ratio and rules for risk weighting.

On the other hand, MMT economists have observed that there is no hard capital constraint in that banks can and will obtain capital as needed to if they have creditworthy customers who are willing to borrow at a rate profitable for the bank. For example, increasing capital requirement doesn't reduce the amount of lending but rather the profitability of loans as banks have to hold more capital for the same amount of lending.

So in the final analysis, the only hard constraint on bank lending is the level of effective demand for loans profitable to the lender.

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Banks: Reserves sorted. Now lets talk capital

by Neil Wilson