Banking in PH Part II: Raves for BSP transparency & a look at individual banks

Banking 0201This article has three basic parts: (1) praise for BSP transparency, (2) review of Part 1, and (2) scan of individual banks.

Praise for BSP transparency

One of the thing that astounds me is how ignorant I am about what is going on within Philippine government. I draw conclusions easily within this ignorance, and I can see that voters do the same thing. It is surreal how convinced we come to be without knowing anything at all about what government is REALLY doing. Rather, we spend our time concocting elegant defenses of our ignorant position using simplistic or mythical arguments picked up in tabloid media.

It is a huge problem, and . . . granted, we should accept accountability for our lazy presumptuousness . . . but I think it would help if government were to do a better job of popularizing their successes.

Several months ago, I was rummaging around on the web site of the National Economic Development Authority (NEDA)  and was impressed with the superior work done to put plans and metrics and data (e.g., status reports on infrastructure investments) into place. These are the stuff of good corporate management. This work is one of the unseen disciplines that President Aquino has put into place (yes, there are disciplines other than Duterte’s “kill them”), and all future administrations will benefit from this fine groundwork. NEDA has continued to develop depth in its plans and reporting, with separate long-term plans being developed for National Development, Manila Transportation and Manila Floods.

When you feel the need to disabuse yourself of the notion that Philippine government is “inept”, visit the NEDA site and prowl around. Presidential candidates should be required to do this. Another site to investigate is the much maligned (for “DAP”) Department of Management and Budget (DBM). Do that and you will join the ranks of the rare, the unique, the informed.

A third data-rich site to visit is Bangko Sentral ng Pilipinas (BSP). Head directly to the Key Statistics page, and click away. Start with metadata. The financial and economic health and wealth of the Philippines is at your fingertips.

I believe President Aquino does not jump and shout for FOI because he knows his agencies have “bought into” transparency, and BSP is leading the way. It helps that the agency MUST HAVE sophisticated computer systems to handle their business, and they can dedicate a portion of that computing power to statistics and reports. That is the track that other agencies are also on, but some have not progressed as far. They will.

Why is FOI needed when the press and even presidential candidates do not trouble to read what is already there?

Kudos to BSP and it’s management team under Secretary of Finance Cesar Purisima  Amando M. Tetangco, Jr.  World class.

Review of “Banking in the Philippines, Part I, the fundamentals

In the first section, I wanted to present a basic overview and “sizing” of different elements of the banking industry. We learned that:

  • Universal and commercial banks – 40 of them – represent 88.6% of all banking assets.
  • There are numerous specialized banks and non-banks, like thrifts, rural and cooperative banks, trust companies and pawnshops (over 17,000 of them!!).
  • The assets of the large Universal banks (80% of total assets) are comprised very roughly of 1/4 debt securities, 1/2 well diversified loans (primarily to businesses; consumer loans are minimal), and 1/4 is “other”.
  • Funding of assets at Universal banks comes primarily from domestic deposits (85%) collected from branches.
  • We structured a “to do list”:  (1) look at income and performance ratios of banks, (2) examine individual bank financials, and (3) understand “grass roots” banking better: microfinance, pawn shops and payday loans.

This second installment leads us into individual banks.

A look at individual banks

First, let me provide three excellent reference sources on banking that are derived from the sophisticated regular six-month comprehensive reviews provided by BSP:

  1. The Philippine Banking System as of June 2015
  2. The Non-Bank Financial Institutions with Quasi-Banking Functions as of June 2015
  3. Appendices (Data Tables) as of June 2015

This information is exhaustive, and exhausting to go through. But there are gems in the Banking Report, such as the above chart on banking consolidation. The “Non-Banks” will be looked at in a later blog article, but for those of you interested in this field . . . there you go. The Appendices provide the nitty gritty facts and figures as to how numbers roll up and trend. We’ll dig into a few of them as we proceed.

What I learned by searching for individual banks is that there is a better classification than “Universal or Commercial”, and that is to consider banks according to their charter as: (1) Private Banks, (2) Government Banks, or (3) Foreign Branches and Subsidiaries. Here’s how the pie slices:


Local banking is done by private and government banks. Foreign units are mainly centralized in Manila. With new rules for ASEAN integration, we may see more foreign banks with broad networks.

Here’s how the individual banks sort out, ranked by asset size, and reporting number of offices. I apologize for the small type; it’s a lot of information to squeeze in here.


There are four “trillion peso” banks and four “half-trillion peso” banks. In “street lingo”, the four big gorillas, representing 54% of all Universal/Commercial assets, are:

  • BDO
  • Metrobank
  • BPI
  • Landbank (Gov’t)

The second tier, representing 19% of all assets, are:

  • PNB
  • Development Bank (Gov’t)
  • Security Bank
  • China Bank

As we look at individual banks in detail, I suspect we will find that government bank balance sheets are very different than those of private banks, as the government banks handle CCT payouts and other agency programs.

The next step in digging deeper will be to compare the balance sheets and performance ratios of the four biggest banks.

By way of perspective, at 47 pesos per dollar, BDO, with US$ 39.0 billion in assets, would rank as the 35th largest bank in the United States based on US Federal Reserve rankings.


Erratum: With apologies, the head of the management team at BSP is Amando M. Tetangco, Jr. as Governor of BSP and Chairman of the Monetary Board.

195 Responses to “Banking in PH Part II: Raves for BSP transparency & a look at individual banks”
  1. FOI is a good thing, but people must be able to interpret data correctly and in context – they can’t.

    Data is not information is not knowledge is not wisdom. An undergraduate graduates as Bachelor.

    Unliquidated Yolanda funds as per COA are NOT stolen money. Davao, Iloilo and Albay prosper.

    • Joe America says:

      That’s true. It takes a skilled analyst or specialist to probe the information, and neither journalists nor regular people are inclined to do so. But the law would instill new disciplines, requiring the automation of tasks and reports that are now done manually, and perhaps generate a new breed of social media people who would find the data, and set it up for popular appeal.

      If I were Executive in future administrations, I’d continue to have a “data geek” like MLQ3 to probe and popularize the data for journalistic consumption.

      • – this is about INTRA-Governmental sharing of data… something DOST has been working on for years… the fiber optics backbone of the government is part of it… Bam Aquino is involved in this BTW… another geek of course. The next step is to share data with the stakeholders, i.e. citizens… but this stuff has to get off the ground first and they are building everything by themselves, not buying abroad.

    • karl garcia says:

      When you make cash advances and you were not able to produce receipts, then it is like stealing.

      As for undergrad, even job recruiters or interviewers,I encountered gets confused with undergrad,when I mentioned undergrad, they asked if I graduated College..

      • I would say the receipts still have to be produced, so pending that not yet clarified… and what is absurd are the memes circulating that connect Mar Roxas and jump to the conclusion that the money is being used for Fast Forward and other campaign stuff.

  2. My dealings with government people expose me to the general sentiment expressed by Irineo.

    The first fear is that the unthinking media just uses this to destroy trust in government because they cannot be bothered to understand or explain things.

    The second sentiment against FOI is that save for agencies with sizable IT divisions the burden of producing the information within 2 days to 2 weeks depending on the bill is would create a burden to these agencies.

    An example of this is that the DSWD have a separate and relatively well manned team whose job is to update the listahan or list of beneficiaries of its programs.

    • Sweden has FOI… I think most other Scandinavians and the Dutch have similar stuff to.

      Germany does NOT have FOI, nor does it have much direct democracy except for Bavaria. The Swiss have had direct democracy… but in the end you need responsible people for it.

      • In Bavaria anyone or any group can make a petition… but it has to be signed by a sizable quorum of inhabitants (locally or state-wide depending on scope) with national IDs shown to become a real referendum… and the results of that referendum are binding for 10 yrs.

        Example: tall buildings caused some conservatives to start a petition to limit building size to 99 meters, the height of Munich’s cathedral’s. The referendum was a success for them.

        But due to the principle of “legal security”, buildings already there were NOT shortened.

    • Joe America says:

      On the other hand, it would likely accelerate the application of computer power to make data available in those agencies that today still depend on paper.

  3. NHerrera says:

    This reading tells me then that not only are NEDA, BSP and the Banking System doing their job well and have records to show for it, but we in the Philippines have the good fortune that the general political mindset especially the worse half of it has been quarantined in a manner of speaking from these vital institutions. Thank heavens for that.

    • Joe America says:

      Ah, a positive outlook for sure.

      I am still stunned, though, but how negligent the media are at conveying the truth to citizens, that the Executive branch is doing a WHOLE LOT of things right, and doing them well. It’s unfortunate, and I suppose a shortcoming of the Administration that it has not found a way to popularize its successes.

      • Hard to show Filipinos work in progress when even the “we will study it” statements of Aquino are seen as “not doing anything”. Charges are now being pressed on “tanim-bala” by NBI, but most people still think nothing was done, ignore the results. How much more for work in progress like IGOV.PH (IT infrastructure both hardware and software for the government) or the DOST AGT (fully locally made train to AVOID MRT problems of having to wait for parts from abroad) – or Lambat-Sibat which was first piloted in Metro Manila, so everybody thinks it didn’t help anything, damn Lambat-Sibat is 100% the Bavarian State Police approach – go for the big fishes using Intel and lightning raids, like FBI stings…

        • NHerrera says:


          – too many major problems accumulated over time over several administration, traffic congestion in EDSA being one (in this one sadly a lack of simple recognition of vehicle increase, data being there, and road capacity)

          – requiring solutions with a non-zero gestation period even with unlimited resources

          – limited resources made worse by a long bidding, contracting process because of government procedure and non-aggressive pursuit because of possible corruption charges being made by losing bidders

          – layers of red tapes

          – non-use of time saving computer tech because it will not allow under the table transactions

          – change in admin with the new one with different priority; no continuity

          Yes, Irineo a lot of these have been and are being addressed, but we need solutions of all these TODAY. We need a President who can take short-cuts like killing a suspected bad guy as in the movies; no need for court process that takes time. Unfortunately, projects have gestation period and cannot be shortened from years or months to a day — no matter how many heads are made to roll. “Off with his head” just will not do.

          And a news reporter like me will likely be fired within weeks if I write out my report considering these nuances. Better for me to report about Presidential Candidate A saying he will slap Candidate B; and that B will slap back A.

          • karl garcia says:

            it would be easy to suggest Get rid of ten year old vehicles or older.But look at what happened to the squatters relocated to Bulacan and Laguna, they are backto where they came from because besides lack of utilities and services, there is no mass transport.

            • karl garcia says:

              Off with their heads is like Alice in Wonderland.

            • ulk! Heavens, I hope they wouldn’t suggest getting rid of ten year old vehicles, otherwise I will lose my old friend – Isuzu Crosswind XT. It’s still in a fine running condition, well maintained and for family use only. It served us well yesterday, going to Batangas to fetch the old folks, then to Tagaytay City for, then back to Batangas, then home to Metro Manila.

              This reminds me of an unhappy and frustrating experience I have with a local bank with regard to that car’s acquisition. We made a substantial DP on it, and the rest was paid by the bank with a 2-year loan. A few months later, we pooled our existing and new funds and came up with an amount enough to pay in full the car loan. I wrote a letter to the bank and requested a computation, expecting a smaller figure since we are planning to fully pay it in advance. Horror of horrors, an answer came telling us that we need to pay the full amount of the loan without the expected interest rebate, in short, we need to pay the computed monthly amortization multiplied by 20 months. After more failed discussions, we decided to just continue with the 20 monthly payments, I didn’t have the energy to be my normal argumentative self as my mother’s health has worsened and doctors are already asking us to sign a DNR (Do Not Resuscitate) and she died not long after that.

              I lost the will to report the bank to the BSP.

              • Car loans she structured that way Mary. It is a fixed percent fixed term loan. I asked the loan officer why it is structured that way and she answered that the loan would not be worth the risk if it is structured like a housing loan.

              • Yep, you might be right there, Gian. That’s what the bank officers told me in one of their responses to my pangungulit. Although it could depend on the banks giving the car loan. My brother-in-law was given a proportionate rebate when it was his turn to make an advance full payment. He did it with BDO and East West Bank for two his cars, bless them.

              • chempo says:

                This is a good point since we are talking of banking environment in Philippines. Perhaps Joe should take this up. I think what’s missing here is hire-purchase financing. I don’t think there is such an act in Philippines. Car financing, as well as big item equipment financing, is mostly done this way in other countries. Under hire-purchase, the accounting is also done differently.

          • The problem is therefore the readership… the market drives the need.

            Data is not information is not knowledge, much less wisdom.

            Most of the stuff in the papers is data… Inquirer, PDI etc.

            Rappler, Interaksyon and CNN Philippines at least offer information.

            Mindanews actually offers some knowledge, but mostly about Mindanao.

            In fact I have seen some Mindanews editorials which are wise, very wise…

            • sonny says:

              PiE, deja vu, viz data pathways & data access-transfers speeds, thruput to I/O devices: CPU, cache (nanosecs), DASD devices (microsecs), I/O (display, print, microfiche, CDs etc), etc … and of course, telephone lines. These basic data processings concepts MUST become the classroom stuff for young and old alike. This level does not necessarily need individual hardware, a well-designed combination of demo and queued hands-on will do the job like basic English, arithmetic, algebra. We must transition from data-users to information users if we must skip information chauvinism at all levels, obfuscation at the media level and demagoguery at the governance level. I think.

  4. karl garcia says:

    back to bsp transparency. Since I accidentally posted this in another blogpost might as well repost it here.RHiro,being a forensic financial analyst,often has something to say with BSP data.So he will be one to disagree with the citing of BSP’s transparency.

  5. Marius Dejess says:

    I tried to log in at 7:06 am today Dec. 16, 2015, Wednesday, to post on your article about critical thinking vs thinking critically, but could not get connected; so I guess I have been banned without notice but by just being locked out.

    Or perhaps some connection problem from the part of your transmission station?

    Please inform.

  6. Rank Merida says:

    I’ve been a lurker here since Joe was yet the only blogger. I must now “out” myself because of this part of the blog:

    “Kudos to BSP and it’s management team under Secretary of Finance Cesar Purisima. World class.”

    I was with BSP for 31 years and kind of proud for that.

    But please let it be known that Mr. Purisima is only a member of the Monetary Board as government representative. The guy that is head of the management team is Amando M. Tetangco, Jr. as Governor of BSP and Chairman of the Monetary Board.

    I was about to share this with friends at BSP but I have to wait until the erratum is acknowledged.

    Rank Merida

  7. wangad says:

    i look at the banking system a necessary evil. on one hand it is somewhat a ponzi scam and on the other hand it facilitates trade and exchange. ponzi scam because what the depositor puts in is not what it gets out, though it may seem that it is arithmetically at least equal or more, but in real value it is not. the banker (owner) is all the time the winner because he gets paid for the services. when the
    banking institution goes kaput, the losers are always the depositors and the institution itself. because of inside information in the banking system, the owners can always remove their investment so that they are able to take out what they put in. and what is left in the institution’s coffer, this and the insurer’s guarantee will be returned to the depositors…and most of the time, the amount returned is less than what is the depositor’s account balance.

    the banking institution becomes tenable if money is always going in to the institution so it can pay the interest of the depositor and any withdrawals. what if each depositor will take out all their deposit? the assets of a bank seem to grow big arithmetically due to inflation and accounting magic but its real value does not.

    in the bank we deposit money. if one deposit $100 at an interest of 2%pa, one would be able to get $102 after a year. the bank will then loan this at 6%pa to a borrower. thus the bank makes a clear take of 5% by being the go between the depositor and the borrower. if we deposited 100 grams of gold, by same logic the bank will get 5grams of gold. if it lends the 100grams of gold, the bank makes money.

    but when one deposits 100 grams of gold to the bank, they will credit the value of the gold at the time one has deposited it. for simple calculation, let us say the price of gold is $100 per gram. if mr a deposited 100 grams of gold on 1 jan 2016, mr a is credited $10,000 (and mr a agrees that this is his gold money now). and on 1jan 2017, mr a will have $10,100 not 100 grams of gold. on 1may 2016, the price of gold went up by $4 per gram so the bank gold money became $10,400. the bank clearly made $200 (the other $200 is to pay the interest). and if he loaned this gold money, the bank will have earned another $600. wow that is a good $800 just being the go between…mr a gives money to mr bank and mr bank loans to mr c.

    unless a good deposit contract is made, the reality is mr. a sold the 100grams of gold to the bank and the proceeds of the sale is credited to mr. a’s bank account. if mr a thinks he lost in the transaction then he needs a good lawyer to get back his gold.

    as a simple man, in a nutshell this i think is how banks operates, they provide service and they should be compensated for the service. where i disagree with some of the banks operations is the bank owners get their lavish lifestyle on the back of the ordinary depositor. i just made the numbers small so it is easy to do the aritmethic. think of the gold as the collateral for the exchange/loan and the loan interest is not really 6% but much higher.

    • Joe America says:

      Nice analysis, wangad. Yes, a deposit that earns 1% when inflation is 3% is actually a negative-earning investment. The problem is, there are few places that we can invest money that is risk free and safer than home in the closet . . . so a bank provides us that service. On the lending side, the bank takes a lot of risk, and that is the highest value of a bank, and why they deserve to make a healthy profit. When they loan $100 and the loan goes bad, they don’t lose the interest amount of, say 9%, they lose the whole $100. So they have to make 11 more good loans at 9% to recapture for the loss (setting expenses aside).

      Banks provide a valuable function, reasonable security for deposits and reasonably priced loans. I have not gotten to the regulatory aspect yet. In the US, they are closely regulated, so failures are rare and are “covered” by regulators, and banks are well-run businesses for the most part.

      • Micha says:

        “When they loan $100 and the loan goes bad, they don’t lose the interest amount of, say 9%, they lose the whole $100. So they have to make 11 more good loans at 9% to recapture for the loss (setting expenses aside).”

        That’s not exactly true Joe. When loans go bad, banks would confiscate either your collateral or the asset that you built/purchased using that loan money. In the case of home mortgages going bad for example, banks would kick you out and re-possess the house.

        The real estate developer gets fully paid, the borrower lost the house and is now living in the streets, and the bank is in possession of a real asset which it could re-sell to another loan applicant.

        Bank of America alone is in possession of hundreds of thousands of these home mortgages gone bad and is set to make a handsome profit as the real estate market recovers.

        • chempo says:

          Micha your comment is obviously correct in respect of the banks course of action as regards the borrowers directly. I think Joe is making the point that in the banking business the loan pricing takes into consideration the need to cover delinquencies. This is factored into the margins and thus rate spreads are high, thus Wangad’s gripe that he earns 2% whilst bank’s earns 6% at his expense. And that is the reason why credit card interest rates are exhorbitantly high, especially in Philippines, because card delinquencies here are way too high.

          • Micha says:


            I’m not taking issue with the discrepancy between deposit rate and the lending rate. Indeed that’s how the bank’s racket or usury is done.

            I’m taking issue with the claim that when the borrower defaults, the bank losses “the whole $100”. In most if not all circumstances, borrowers default after they already have settled part of the loan by paying the monthly dues.

            That’s in addition to the fact that if a borrower do indeed eventually defaults, the banks could resort to either confiscating the borrower’s collateral and/or assets.

            • chempo says:

              I understand your point but you are still not getting my point.

              • Micha says:

                Right now, I’m not interested in how banks price their loans. That’s just profiteering, pure and simple.

            • Joe America says:

              Usury is generally defined to mean illegally high interest rates, and banks do not charge usurious rates. Even pawn shops here are regulated and charge rates allowed by law. Now, I consider banking not to be a “racket” but a legitimate intermediary function. Whether pawn shops fit that description yet, I don’t know. It’s a topic for further investigation and discussion.

            • chempo says:

              In other countries where banking is competitive, Micha’s charge of profiteering is outrageously so untrue. Banks try to outbid each other to tenths of basis points for heaven’s sake.

          • I have an office mate who made the mistake of paying only the minimum amount due as billed by the credit card company. Her world came tumbling down when she eventually realized that her 20K credit limit ballooned into more than 400K in outstanding bills as she taught she could continue her shopping sprees (for her family needs). Lawyers came to the office and attempted a garnishment proceedings against her salary. It took her 48 PDCs to fully settle her obligation (extra judicially) and vowed never to touch another credit card again.

            Am so fond of using that plastic money myself, but am so stingy when it comes to unnecessary interest payments, the credit card company does not earn a single centavo from me, I’m told that they get their income from the business merchants, as I settle in full every month, even my annual fee is waived for life. The best is Union Bank, which gave me a 100K non interest loan just by agreeing to activate my credit card with them, which I haven’t done so for years.

            Why are banks sharing their client’s confidential information with each other? I asked them when I receive so many unsolicited, pre-approved credit cards from numerous banks as they know most of my personal info, but I couldn’t get a straight answer only evasive ones.

            I wonder if this is legal.

            • chempo says:

              Good for you Mary. Discipline is needed if you want to use credit cards.

              Many credit card holders make these mistakes:
              – They use the card for big item purchases. That is a No-No. Credit card is not a financing facility. It’s a convenience and security facility.
              – They don’t understand the rates are extremely high, which means you need to pay off immediately. They moment you stretch payments, your woes begin.
              – They don’y understand that for the privilege of using the cards, they need to help the bank to defray their high delinquency costs.

              As regards selling confidential info, I can vouch for that. There was a time I was using Amex card member listings for a business project. I got from a friend of a friend.

            • Joe America says:

              I don’t know if it is legal or not. The credit rating agencies in the US provide a valuable service by sharing credit histories. It is one of the elements that keeps rates down. The problem in the Philippines is that there are people who could benefit from borrowing because they have a steady job and can acquire a car or home on the expectation of continued good earning power IF they can establish a track record. It’s hard to establish that track record, therefore banks play their games to make sure they come out whole. I will do a blog, I think, to research what agencies do exist, whether laws permit sharing of information, and figure out if this is an area where growth is being blocked by poor information systems.

              • Back when I was still in that financial intermediary, I remember that the company was a member of CMAP – Credit Management Association of the Philippines.

                But the info shared is the credit worthiness of respective clients when requested and when available, not personal and confidential information.

              • Joe America says:

                There should be rules to identify what can be shared and what cannot. I’ve not studied that.

            • Joe America says:

              I don’t know if it is legal or not. The credit rating agencies in the US provide a valuable service by sharing credit histories. It is one of the elements that keeps rates down. The problem in the Philippines is that there are people who could benefit from borrowing because they have a steady job and can acquire a car or home on the expectation of continued good earning power IF they can establish a track record. It’s hard to establish that track record, therefore banks play their games to make sure they come out whole. I will do a blog, I think, to research what agencies do exist, whether laws permit sharing of information, and figure out if this is an area where growth is being blocked by poor information systems.

          • DAgimas says:

            The interest to the depositor is not the only cost of the bank. they could not loan this deposit 100% too because of reserve requirement. they also insure these deposits. and of course theres overhead.

            some banks here in the US don’t want even deposits because they have nowhere to park or lend. so its a cost for them. so instead of giving you miniscule interest, they charge you for safekeeping. (that’s the cost to insure the deposit + Overhead)

  8. DAgimas says:

    it is understable that the BSP and the NEDA have good data bases or research. the industry is populated by competent people. it is also meritorious. a clerk in a bank can expect to climb the ranks of a bank.

    I even know a security guard of bank who became a lawyer and later on a VP.

    for NEDA, they get “all” the scholarships awards to study abroad. so the expectations is high and they deliver. the problem is the politicians don’t want to use whatever they recommend.

    • Joe America says:

      Excellent points, DAgimas. It’s good to know that there are career paths in banking. I agree NEDA is under-appreciated, not just by politicians, but the people in general. There IS professionalism within the Philippines. We are led to believe otherwise by a few agencies that jerk us around (LTO, Customs).

      • DAgimas says:

        if you come from an unknown school (not a cum laude from the big 3), you start as clerk..its a great equalizer really..after 5 years rotating from various low level positions, you must have learned how to play office politics already then you start climbing the ranks (joke with some truth to it)

        generally, banking (for the bankers) is about much deposits you generate, how much loans you lent..thats how they measure your competence (more or less). the higher your sales, the faster you climb the ranks

        • Joe America says:

          That is the same as in the US, including the office politics. Branches here are STARTING to get into the customer-service, sales mode, but they mainly aim it at the people with large deposits. Land Bank is not on that course, though, it would seem. Still authoritarian.

  9. DAgimas says:

    it helps too that the BSP pays its employees higher than an ordinary government agency

  10. Micha says:

    For updated understanding of modern banking :


    “In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

    “Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.”

    • edgar lores says:

      Does not the money that the bank lends come from somewhere? Meaning the money pre-exists?

      • Micha says:

        Nope, new money is created ex nihilo when banks approve a loan.

        • edgar lores says:

          Thanks. My layman’s understanding is that the loan comes from the deposits of other bank accounts that are merged to form a pool.

          • Micha says:

            That’s the old or classical form of understanding shared by both Joe and chempo.

            This is an official paper coming from no less than the Bank of England explaining how modern banking and money creation is done :


            • chempo says:

              MIcha, we are going round in circles in this discussion. Go back to my old article on bank credit expansion.

              Let me re-state and clarify here:

              Let’s use the First Cause scenario. Start from Day-0, where Bank L has no money at all.

              Day 1- Bank L gives you a 10,000 loan – a simple way works like this (there are a few ways):
              It creates a loan account and debit this a/c 10,000
              You open a current a/c and the bank credits this a/c 10,000.
              So Viola, per Micha’ penstroke

              What happens here? 10,000 electronic money is created because you have money in your a/c. Money supply is increased by 10,000 because deposit money goes up.

              The Bank L does not need to wait for any money from depositors money to come in before they create the loan. WHY? Because there is no funds moving YET. Nothing has moved.

              Now comes the close of business. The Bank L needs to find 2,000 to deposit into their Bangko Sentral reserve a/c. Where to get this money if during the course of the day they have not received some money from other depositors? Of course the bank may borrow overnight in the money market – this is one option which let’s say they borrow from Bangko Sentral.

              Bangko Sentral will:
              Credit Bank L reserve a/c 2,000
              Debit ??? (Let’s say Cash a/c) – 2,000
              So Viola, per Micha’s penstroke

              Day 2- you decided to drawdown on your current a/c (what’s the loan for anyway if not to be used?). So you write a 10,000 cash cheque and go to the bank. Now how is the bank going to pay you? Where is the cash coming from? You got no funds at all???

              To make it more complicated, instead of cash cheque, you write a payee cheque your landlord who banks in into his a/c at BDO. Still no problem for Bank L because there is no funds movement.

              Day 3 – the check clears. What does this mean? It means Bank L tells the Clearing House the 10,000 check drawn on them (Bank L) is good for payment. So Clearing House clears the transaction for Bangko Sentral to effect the settlement.

              Now comes the close of business. Bangko Sentral will move funds from Bank L to DBO’s reserve a/c.
              Credit BDO reserve a/c 10,000
              Debit Bank L reserve a/c 10,000
              So Viola, per Micha’s penstroke. NOT SO FAST. Can you tell me how much funds is there in this a/c? Only 2,000. Bank L is out of funds by 8,000. Where is this money coming from?

              If Edgar is perplexed, so am I. Where is the money coming from?

              From theorists’ fancifully worded treatise, money is not needed. The problem only comes when we actually ask “Where is the money?”

              • Micha says:

                Jesus, we’ve already covered this. But because it’s Christmas, I’d supply the tutoring for free for the nth time :

              • chempo says:

                Thanks for the gift haha.
                Micha you and I understand the material because our English is alright (RHiro might not agree to this haha). Our disconnect is that we interpret the real world part differently. An academic description of a system necessitates envisioning it a model, that I appreciate. You still place the model in the air, whilst I place the model on the ground.

              • chempo says:

                Let’s just ask practical questions. In my illustration above, just tell me where is the money of Bank L coming from to pay out the 10,000 loans?

              • Micha says:

                chempo, do you understand what ex nihilo means?

                The bank creates new money out of nothing by giving out loans.

                How much more simpler an explanation do you need?

                Ex nihilo.

                Out of nothing.


              • chempo says:

                Creating out of nothing is one point of view, which I understand. As in imy illustration above, Bank L simply debit a loan a/c and give the money to borrower by crediting his current a/c. YES that much is creating out of nothing. BUT then, how is the bank going to give the borrower when he wants it — in CASH? Even if it’s in payee check, sure the net operation will be central bank debit and credit the borrower’s bank (the drawee bank) and the bank who receives the borrower’s check. But where is the drawee bank going to get the money to put in their a/c with the central bank in the first place?

                Micha you simply cannot see the operational part, you only view models and interpret it in theoretical dimension.

                Just bear me out in this, cos you say Joe and I only hold a classical view — in relation to bank credit expansion.

                Now I have described it in detail before, so I’ll just shorten it. In systems with reserve ratios, such as Phils, it’s as described in traditional textbooks. Say the ratio is 10%, so a depo of 1,000 a bank lends out 1,000-100, next bank lends out 900-90,and so on. Total creation of money is 10x. Now that’s a mathematical model. And you were thinking we classical types think that the bank will wait for a deposit of 1,000 and then approve a loan of 900, and next bank waits for depo of 900 then loans out 810. GOD you must be so niaeve to think that. It’s just a model that explains the big picture of what happens in credit expansion.

                Actual bank lending has nothing to do with this model. Lending activity goes on independently of the deposit side of the bank’s daily business. The Loan Manager can make all the loans that he want, but he better be good pals with his Treasury Manager who has to look for the money to fund all those loans.

                Certain parts of the whole process are yes, keystrokes. But there are real money for goodness sake.

              • Joe America says:

                I defer to you to continue this conversation, chempo. We are echoing each other, but Mica is not hearing.

        • Joe America says:

          Edgar, banks are required to have a balance sheet with assets (cash, loans, property) and liabilities (deposits, borrowed money) plus equity, like any business. They pool their funding to make loans, so generally, yes, there are deposits backing the loans. They don’t just have assets (loans) backed by nothing. I think Micha is making one of his theoretical points that, in application, mystifies me.

          • Micha says:

            Joe read the link. And give yourself a gift of understanding modern banking.

            • Joe America says:

              Modern banking is the same old banking. You take deposits and you lend them out and make money. It is stored and transferred in electronic form. That esoteric, theoretical stuff is good for the academicians who have never run a bank and argue irrelevancies. Relevant is when a customer takes bank notes and entrusts them to the bank for safekeeping and whatever interest is available, and when a customer wants a loan to buy a car, and get’s a manager’s check to the auto dealer. The bank facilitates those needs, and is not the bogeyman, profiteer you make it out to be.

              Now the auto dealer takes the check, deposits it to his account, and somewhere in Tokyo, it is withdrawn to build another Lexus, and a part goes to profits (and dividends), and that’s how the real world works.

              • Micha says:

                Evidently, you didn’t bother to read the link at all. Sad.

              • Joe America says:

                I read parts of it, and it says what I was saying, why people deposit money (security). But when it moves into the economic stratosphere to describe the making of deposits through lending, well, that is a break into academics away from the business of banking. A bank raises deposits and lends them out. The matter of money circulation is pertinent to the Fed, perhaps, but not to bankers at work, attending the ALMC meetings to get their maturities matched and going to Credit Committee meetings to get the loan quality right. Don’t be sad. Go get a job at a bank and meet the real world.

              • Micha says:

                How much more real can a Bank of England press release on money creation get?

                It’s not in the stratosphere, it’s anchored on solid ground.

                It’s not too late for you to learn the trade.

                97% of money in circulation are bank created money.

                Wrap your head around it.

              • Joe America says:

                The Bank of England is a central bank, like the Fed. They are concerned about things that bankers who generate deposits and make loans are not. I recall as a young executive working on a paper for my boss that I made reference to money circulation and he threw the paper back at me. “Get that out of there. It is nonsense.”

                What we have, as chempo has noted, is two different perspectives. One, economic. That’s yours. The other, business. That’s mine. The economic perspective is valuable for those who set monetary policy and rates, and is not something everyday bankers need to get distracted about. I know the trade, having worked in it for 30 years. I did not work in academia or at the Fed. They have a different job. Different information. Different disciplines. Wrap your head around that.

              • Micha says:

                Uh ok, so you were just a poor banker trying to corner as much deposits as you can so you could lend it out to somebody else?

              • Joe America says:

                Why is it that you and R. Hiro take on this snide attitude of intellectual superiority and condescension? Is that taught in college economics programs or what?

                You gave me a reading assignment, and I offer one to you. Banking schools often make use of a banking simulation course built on a a model which takes decisions the managers make and translate them into results for the bank. This link profiles that simulation and will give you an idea of the disciplines that are taught. They are very pragmatic disciplines. You only need read the first page and a half; the rest is optional.


                Basically, yes, in answer to your question. That is exactly what I did, generate deposits, although I was not a “poor” banker, but a business executive. And, yes, our job was also to generate as many high quality loans as we could to both the consumer and business sectors. It was and is an honorable profession.

              • Micha says:

                Further, what the Bank of England paper describes is the nature of modern banking itself. There is no economic or business distinction, just operational description.

              • Micha says:

                If you don’t mind Joe, when did you retire as a banker? The reason I ask is that the BOE paper came out only in 2014.

                That may offer a clue to the discrepancy in our perspective.

              • Joe America says:

                I retired a number of years ago, but the difference in perspective has to do with the usefulness of the information. Bankers are not economists, they are businessmen creating and selling product and operating under rules aimed at keeping depositor funds safe. A central bank has a different job, and the insights you present I presume has more value to them. To convince me otherwise, you would have to show an example of how a commercial bank changed its operating routines based on the new way of looking at things.

              • chempo says:

                @ Joe

                BOE, and some other countries, do not use Reserve Ratios and what this means is that banks capability for credit expansion is infinity. BOE prefers to regulate liquidity by using what they call Liquidity ratios, which basically means a bank’s deposit base must have certain % of specified liquid assets. To this extent, BOE, as compared to Banbgko Sentral, has a tougher job managing money supply. This is nothing revolutionary. Been going on for ages in some countries.

                When you simplify everything, the business of banking is twofold — attract depositors like hell and lend out judiciously. Has never changed even with the advent of computers. Micha cannot see deposit and loan being independent operational processes.

              • Joe America says:

                Interesting on BOE. I didn’t know that. I’m for sure not an expert on central bank ideology and practice, but I know domestic banking as done in the US.

              • edgar lores says:

                Monetary theory seems to be more convoluted and arcane than theology.

              • Joe America says:

                At least the religions have a reference book. The economic priests all print their own.

              • Micha says:


                My sister-in-law also works as a personal banker at Bank of America branch. Her job, according to her, is to collect deposits. I asked her one day how does her bank process loan applications and she said she has very little idea because loans are handled by different bank department.

                So yes, I understand perfectly that deposits and loans are processed independently.

                And right there is your clue that deposits don’t create loans.

              • Joe America says:

                It is an intellectual concept that has no applied value as far as I can tell. Rather like seeing clouds as animals does not make real animals.

              • chempo says:

                @ Micha

                So please to ask your sister-in-law for what is the purpose of her collecting all those deposit money from her private banking clients?

                Now I’m not sure how private banking is done in her bank. In international banks private banking is not a simple case of attracting deposits. They are managing their clients portfolio. Meaning clients put money with the bank and they invest for them in whatever products they can sell them, be it equities, foreign-exchange, options trading, mortgage securities, etc. In other words, it’s not deposit money.

                But I suspect in Phiilippines, because banking is not yet that sophisticated, getting customers to place in time deposits are also called private banking. If that is the case, ask your sister-in-law where all those funds go and are they real money?

              • Micha says:

                Geez chempo, depositors open bank accounts to facilitate ease of transactions like paying utility bills. SSS pensioners open bank accounts so that their monthly gov’t checks gets directly deposited. Ditto with students who are grantees of scholarships. Or employees receiving monthly salaries. Bank fees of varying amounts are charged in each of those transactions. Banks make money on those services. That’s the purpose for brick and mortar banks.

                Investment banking, on the other hand, is handled entirely by different bank department. That dual ability of banks – the traditional brick and mortar and investment banking – was enabled when the Glass-Steagall Act was abolished and allowed most major banks to engage in excessive risk taking which precipitated the financial crisis of 2008.

              • Chivas says:

                Yes. It’s the Egyptian’s concept of grain loans and Dojima Rice Exchange in 1697. The ideas are still useful today.

            • Rank says:

              Micha: “Nope, new money is created ex nihilo when banks approve a loan.”

              Edgar Lores: “Does not the money that the bank lends come from somewhere? Meaning the money pre-exists?”

              As far as I know nothing has been created ex nihilo since the big bang. Banks cannot lend unless they first have the money to lend.

              Chempo: “Let’s use the First Cause scenario. Start from Day-0, where Bank L has no money at all.”

              A bank, just like any corporation, is required to have the necessary capital before it is allowed to operate. This can be a source of the money for the loans.

              Can a bank operate and earn money without depositors? Technically, yes. It can earn from its borrowers or from its investments in stocks. But it can earn more by borrowing from the public at, say, 1% interest and lending it to others at 6%. (I think that is not profiteering.) The people from whom the bank borrows are its depositors. And the money it borrowed are called deposits. Deposits, particularly, demand deposits are part of the money supply that is termed M1.

              Now this is where fractional reserve banking comes in. For our discussion, the main purpose is to serve the depositors. (The reserve requirement is also used in tweaking the money supply). If all deposits are lent out, there will be no need for those ATMs and withdrawal slips since there is nothing to withdraw. So a bank maintains a fraction of its deposit in ready cash in its vault and ATMs to serve withdrawals. But much of its reserve is maintained with the central bank.

              When does the creation of money happen? If Pedro borrows P1,000 from PNB and he has a deposit at PNB, the P1000 is credited to his deposit. So the total deposits in the books of PNB is now plus P1,000. Or suppose Pedro has a deposit account instead with DBP and he deposits his PNB check of P1000 to his DBP account, the deposits of DBP has now increased by P1,000. Now remember that deposit is money so the bank has just created money with the deposit of Pedro.

              Whether PNB or DBP, fractional reserve requirement steps in. The bank with the additional deposit must now maintain a reserve for the P1,000. If the reserve requirement is 10% then the bank will only have P900 to relend to another borrower and so on and so forth. According to a book by Paul Samuelson this process of deposit or money creation will come to an end when the total deposits have reached P10,000. And granting that there is no leakage in the process.

              The BSP reserve requirement for deposits is 20% as of May 2014.

              As for that BOE link provided by Micha this is what it says:
              When a bank makes a loan to one of its customers it simply credits the customer’s account with a higher deposit balance. At that instant, new money is created.

              The additional deposit was created from the loan that was approved. The bank had money to loan.

              Suppose Bank of London has just opened. And BOE allowed it to open without any money anyway it can create money from loans it will grant. Here comes Pedro, its very first customer, applying for a loan. As requirement for the loan, Pedro opened an account with the bank. His loan was approved in the amount of 1000 pound and credited to his deposit. Voila, (as Chempo would say) the bank has created money ex nihilo (as Micha would say). Suppose that Pedro will withdraw his money in cash, will the Bank of London be able to serve the withdrawal?

          • Joe America says:

            A bank’s loan-to-deposit ratio is one of the common metrics for assessing a bank’s performance.

    • DAgimas says:

      you can not loan what you don’t have. a $1.00 deposit can only be lent up to what the Central Bank says you can lend. say for example the reserve deposit is 20% according to Central Bank, the bank can only lend $0.80 of the $1.00 deposit. the $0.20 must be deposited to the Central Bank. that’s how it works. even the capital of the bank can not be lent 100%.

      these deposit levels are monitored daily because it says how much the bank can lend for the day.

      again, you can not lend if you don’t have deposits. and these deposits have costs. you have to insure them and you have to pay interest

  11. Had an uncle (an unreachable richie rich part of the clan) who’s now retired. He worked as a BSP director. It’s only now that I came to think about it, I could have approached him and asked for his help so I can apply there right after the financing firm (engaged in a quasi banking functions) was dissolved by the stockholders. Now, why didn’t I ever think of that? Serves me right for not visiting the province more frequently in those days.

    Working at BSP is for sure the cream of the crop employment even to this day, that is, except being a plundering politician.

  12. With the recent spate of ATM card skimming scams reported in the media, I transferred my payroll ATM savings account from a local bank to Land Bank savings account with a passbook. Got a scare when I think of how I deny myself the worldly pleasures of eating (Eating for pleasure easier to overdo than eating when hungry – Heidi Godman) and traveling abroad only to be a victim of sophisticated thieves. I was pleasantly surprised to find out that Land Bank offers high interest rates for individual savers comparative to corporate investors.

    Try it. Any interest rate higher than less than 1% is way better.

    • DAgimas says:

      banks in the Philippines are just prima donnas. when I was working in the bank, any shortage is shouldered by the employee concerned. I mean, its the fault of the employee but they should give allowance also.

      same thing with these scams. unless they can prove that it is the depositors fault, they should credit immediately the missing funds.

      compared that to the US, when an unauthorized withdrawal is made and you reported it, they immediately credit your account. you don’t have to visit the bank and give statement. a call or email is enough.


    For 2016, Philippines is the only banking market in the Asia Pacific region that has registered a positive outlook, according to Fitch Ratings.

    “Philippine banks’ generally-high capitalization, healthy funding and liquidity, and satisfactory loan-loss reserves help to balance the risks from relatively high credit growth over the past few years,” Fitch said in an accompanying statement to the “2016 Outlook: Asia-Pacific Banks.”

    “The ratings also reflect concentrated loan books, developing corporate governance standards, and ownership by large family-controlled conglomerates,” it added.

    “We believe the Philippine will remain attractive to foreign banks entrants in this environment, and banking sector competition will stay keen overall,” Fitch said.

    According to Fitch, a credit rating upgrade for the Philippines will have a corresponding effect on the ratings of DBP, LBP, and potentially, BDO Unibank Inc.

    “Such an upgrade may reflect a general improvement in domestic operating conditions and governance standards, which would likely be positive for the overall operating environment and credit profiles of the Philippine banks as well,” it said.

    • chempo says:

      Whilst the state of banks here are healthy, which is good, the key question here is whether the banking industry is really open and competitive such that the economy is well-served. Is there a certain level or cartel-like practices which is holding back the country’s development. Are spreads here fair enough given bank’s cost of funds. If their cost of funds are high, is it because given the good profitability with the status quo, they don’t bother to innovate, and I’m not talking of computerisation, but in reducing their cost of funds. I think this is the basic issue Joe is trying to figure out.

      • Joe America says:

        Yep, laying the foundation to dig deeper. The next iteration is to look at some individual banks to see how their balance sheets, income statements, and key ratios compare.

      • I may not be in a position to comment on this not being a banking expert. What I will say is my own observation. I think the billionaire businessmen here have diversified their investments. Cases in point: The Ayala group who have been into real estate business (Ayala Land Inc and Avida projects nationwide) and we all know that they are into banking – BPI chain which gobbled up Far East Bank, Family Savings Bank and other I can’t remember anymore, so in effect, they have a captured market in housing loans, Same with Henry Sy of SM mall chain whose stall owners are banking at BDO, now in SM Prime Holdings and they have a Banco de Oro who has a captured housing loan market as well. Robinsons, too of the Go family, with Robinson Land Inc. Robinsons Supermarket and Robinsons Bank that takes care of housing loans for their condominium unit buyers. I am not sure about Andrew Tan of Megaworld and San Miguel. Most of these companies have formed the giant Trident group which is responsible for the planned Laguna Lakeshore Expressway Dike (LLED) project.

        My two centavo worth comment.

        • chempo says:

          Your observations and contributions are certainly helpful, as indeed from anyone here. This particular comment of yours, I’m sure Joe’s Banking articles will lead us to dig deeper here. How deep is this coupling of real estate business and the banking business, will a crash of one industry pull the other down, are there conflicts of interests, etc. The Glass Stegeaal Act was legislated to separate commercial from investment banking but during the Clinton administration this act was abolished. The integration of these 2 different banking business caused a lot of problem in the last 2 financial crisis in the US. We should be looking at real estate / banking under more or less similar circumstances.

  14. Micha says:

    JoeAm, chempo, DAgimas,

    Every single time a bank approves a loan, that is adding newly created money into the economy. A growing economy requires this infusion to accommodate and facilitate new or additional economic activity.

    If, on the other hand, we accept the notion that you both peddle that what the bank lends are depositors’ money, that banks merely recycle the steady limited supply of money in the system from savers to borrowers, you are painting a picture of what is essentially a stagnant economy, where growth is impossible.

    A growing economy requires a growing supply of money.

    Now as to whether we should continue allowing private for profit banks to do this infusion is another subject matter that’s open for debate and further discussion.

    • “That dual ability of banks – the traditional brick and mortar and investment banking – was enabled when the Glass-Steagall Act was abolished and allowed most major banks to engage in excessive risk taking which precipitated the financial crisis of 2008.”

      That financial crisis of 2008 resulted in economic problems not only in the US but worldwide. If for every bank loans that these major banks approve, they are adding newly created money into the economy, is that without state regulation? What if the loan availed of in violation of the DOSRI rule through the use of dummies, was not used to produce more goods and services for economic expansion, just hoarded in a secret bank account in Switzerland, in anticipation of a bank’s insolvency and bank run possibility? It follows that a country cannot leave the creation of new money every time a loan is approved and released.

      The financial crisis of 2008 should be a lesson learned, don’t you think?

      Just an opinion from someone as confused as ever not being an economist nor an expert banker, just someone who wants to understand.

      • chempo says:

        @ Mary

        Bank loans do not create new money per se. Pls see my detailed explanation below. It is when the bank loan proceeds are by way of credit to current a/cs, the electronic money, that money is created. Is there a limit to money creation in this way?. If the central bank has reserve requirements, then YES, The max the banking industry can expand money a function of the reserve ratio and the money issued by the govt.. In Phils it is currently 20%, so if Bangko Sentral issues 1,000,000 currency notes and coins (M0) mathematically, the banks can cause money supply to max at 5,000,000.00

        Where banking regimes don’t have reserve ratio requirements like UK, then credit expansion is infinity.

        Teh Glass-Stegeal Act issue is this — Investment banking is a different kettle of fish. The go deep into financial engineering products, gets excessively levearaged, takes on very high risks (because compensation packages are excessively high), greed comes into play a lot because compensation is tied to profits, their products are often those which are intertwined with various industries such that if one crashes, it creates a knock-down effect across industries and institutions. By allowing commercial banks do all these investment banking stuff a big problem is created. They can allow investment banks to fail, but not commercial bankin because that would affect every segment of the economy.

        What is the lesson of 2008 for Philippines banking? Be very careful of financial engineering stuff. Phils is not big into this territory, but I understand there is some real-estate mortgage backed securities which has potential for trouble.

    • Joe America says:

      It is not a matter of “peddling” anything, which continues your tendency to belittle views that differ from yours. They differ, not for ill intent, but because they originate from a different operating platform, the business of banking. It sounds like you are back to MMT and proposing that the nation would be well served by manufacturing money at will. The central bank can do that, I suppose, as a matter of policy. Since that is the framework from which you are arguing, I suggest you take that up with them. As for the business of banking, regulatory agencies impose the standards by which banks operate, the level of capitalization being foremost among those standards, and capital gets allocated to different levels of risk. If you want the business of banking to start manufacturing money by pushing out loans without regard for quality, or maybe just giving each depositor 25% interest, then you need to get regulations changed. Banks aren’t the villains. It is the regulators who don’t grasp or buy what you are peddling proposing.

      I don’t think there can be a debate until you consider how regulatory guidelines must change to accomplish what you are arguing for. At some point, you have to get out of the ether of ideology and put specific policies on the table.

    • chempo says:


      Micha, I will make a final attempt to clarify things here by describing in a different way. If you still dis-agree, that’s fine. I’ve taken the trouble to elaborate, so please take the trouble to go through it.

      Nobody is refuting the need for money supply to grow in tandem with the economy. I have said few times in past articles on the quantitative relationship of money supply to the GDP.

      We are talking 2 different things, but they are related — MONEY CREATION and LOAN FUNDING.

      When a bank extends a loan, you have to understand 2 things :
      1. It creates a loan asset in their books.
      2. There is a matter of the LOAN PROCEEDS. (a) How the borrower wants to take loan – there are many ways; (b)how is the bank going to pay out the loan proceeds.

      The bank debits Loan a/c and credits Cash a/c.
      There is no money creation by the bank.
      Bank has given out the loan proceeds to borrower in cash, it’s obligation completed. What the borrower does with the cash (loan proceeds) has no impact on the bank.

      The bank debits Loan a/c and Credits Borrower’s current a/c.
      The bank has created money out of nowhere, by keystrokes. Money supply has increased (because credit a/c balances goes into the M2 statistics).
      The bank has transferred the loan proceeds borrower’s current a/c. The bank has satisfied it’s obligation.
      When the borrower utilise their loan proceeds (draws on his current a/c) the bank has to fund it.
      If borrower draws a cash check, the bank pays out cash.
      If borrower draws a payee check, the bank as drawee of the check, need to find FUNDS to pay off the bank that the payee deposits the check into.
      Is the original money created by lending bank now extinguished?. No because whilst the lending bank’s current a/c aggregates has gone down, the procceds of the loan utilised by the borrower finds it’s way into the current a/c in another bank. Thus the M2 remains the same.

      Let’s say bank extends a term loan, proceeds in 3 tranches per borrower instruction.
      Day of loan approval: Bank opens a Loan a/c — but no balances, because it is not drawn down yet. No money creation, no funding requirement.

      Month 1 — Borrower 1st drawing with payment instruction to their current a/c at another Bank (BDO)
      Month 2 — Borrower 2nd drawdown with payment instruction to ABC Co Ltd.
      Month 3 — Borrower 3rd drawndown with payment instruction to convert to US$ and pay to HSBC (HK) favour XYZ Pte Ltd by SWIFT (telegraphic transfer)

      The lender bank has to find funds in months 1,2,3 to pay out as instructed.
      The loan proceeds will take the form as instructed by borrower, eg
      Month 1 — Banker’s Check in the name of the Borrower who then deposits into their BDO current a/c.
      Month 2 — Banker’s Check in payee name ABC Co Ltd, Borrower hand check to payee.
      Month 3 — Lender bank converts the loan proceeds from peso into US$, checks who is the US correspondent of HSBC (HK) (let’s say it’s HSBC (NY)), then lender bank makes a SWIFT payment instruction to to their own correspondent bank at NY to pay “HSBC (NY) favour HSBC (HK) for credt ABC Co Ltd.

      My illustration of this loan is to show different perspectives.

      1. Lender bank has to find the funds at the different loan drawndown dates. — So funding is at time of loan drawings, not loan creation.
      2. Is there money creation – there was no current a/c credits to borrower’s a/c at lending bank. So NO credit creation at loan approval stage.
      3. Month 1 — money is created when borrower deposits the Banker’s Check into their a/c at BDO. The Loan is in the lender bank’s books, the current a/c in BDO’s books, but M2 has increased because deposit money has increased. So money supply goes up.
      4. Month 2 — same as for Month 1. Money is created when ABC Co Ltd deposits the Banker’s Check into their a/c at their bank. Loan is recorded in lending bank, current a/c in another bank. M2 goes up becasue deposit base goes up.
      5. Month 3 — Loan is booked in lending bank, but is money created? Is there a current a/c increase in any bank in Phils? NO. So no money creation, no M2 increase.

      The points here are:

      About funding loan proceeds:

      When the borrower draws down on the loan the bank must fund it. So where is their funds coming from? Various sources — depositors money, shareholder funds from paid up and undistributed profits of prior years capital, banks borrows from various sources — money markets, debenture bonds etc. The bank’s source of fund is dynamic throughout the day. Every minute of the day it is changing in composition and quantum. Hence in banks there is always a very well paid Treasury Manager, usually one of the highest paid guy there. This guy sits in the most chaotic room in the bank, the dealing room. It’s his job to make sure the bank has funds to meet their credit obligations (plus lots of other stuff). The ALMC sits periodically to monitor and plot their sourcing and funding activities and various other issues like interest rate sensitivities and ageing ladders etc.

      Loan proceeds and source of funds are never on a back-to-back basis. The Treasury Manager is the magician. Every day he is like sitting on a pool of funds that is constantly going up and down. At the end of each business day, his pool must be at optimum because this pool is not earning money for the bank, it’s what we call free float. He will end each day with enough in the reserve a/cs and enough minimum balances in their various correspondent bank a/cs all over the world.

      About creation:

      We have been bantering about fractional banking or bank credit expansion.
      For banking regimes with reserve ratio requirements of say 10%, we have talked about how deposits and bank loans expand money supply exponentially. An initial deposit of 1,000 ends up with 10,000 in the money supply. And how you and many new academics scoof at this model. This is just a mathematical model to show how the expansion works overall in the economy.

      My illustration above is in conformity with some new academicians ‘revelation’ that loan cycle proceeds the deposit or funding cycle. It is a real world working, we all know that, it’s nothing new.

      When it comes to a real world practical situation, things are different. For example, in example C above, if borrower takes the Banker’s Check and deposits into his BDO a/c, does it actually increase money supply? Money supply is theoretically increased only by the initial money printed out by the govt. There is no way anyone can ever ascertain where the lender’s source of funds came from that funded that particular Banker’s check. In other words, each time someone deposits money into current a/c which triggers fractional banking, TRACEABILITY OF SOURCE IS AN IMPOSSIBILITY. And neither is it necessary. The mathematical model for fractional banking simply states that mathematically, with a 10% reserve requirement, the maximum quantum for electronic money to be created is 10 what the govt issued, or the M0.

      About inter-bank settlement at Central Bank:

      All interbank indebtedness are settled at the central bank. After the Clearing Houses has processed the days transaction, it is all summarised down to a net figure of who owns who how much. The central bank simply passes the relevant entries in their books, YES keystrokes. But that does not mean no money passing hands. The banks must make sure they have funds in their a/cs there. All those new academicians’ revelation of keystrokes, which is correct, but they remain mum on the actual fundings. If it were all just keystrokes, let’s sack all those Treasury Managers in the banks, we don’t need them

      • Micha says:


        You are a banker but you are overlooking a very important and fundamental nature of a loan : it is an ASSET of the bank.

        Based on your post above, you quibble too much on the liability side of it; or, in your terms, how do banks fund those loans.

        It seems to me you are not paying close attention at all to the explanation on how banks satisfy that liability in the video I earlier posted.

        Here it is again, and start listening at 6:25 mark ’til at least 9:50 to give you a clear summary explanation for your “funding” concerns.

        • Micha says:

          And yes, as far as “loan funding” is concerned, you can go right ahead and fire that Treasury manager.

          • chempo says:

            Micha Micha

            I already told you to discard this video long ago.
            I would suggest this Xmas you hold a party with your sister-in-law together with her coleagues from her bank, especially those from Treasury and Operations Dept, and tell them your views of how a bank get its funds by keystrokes.

            • Micha says:

              chempo chempo,

              You are not stating which part of the video explanation is wrong.

              • chempo says:

                Video explanation is not wrong, but pepople without deeper operations knowledge will miss out on the point I have been trying to make you understand for so long. And which if you followed by long elaboration above, the question remains where is the funds coming from? Yes interbank settlement is by keystrokes done at central bank, how is one bank going to pay another if they dont have funds in their reserve a/c? In the video eg, last say we start at ‘0’. Both banks have nil balances in their central bank reserve a/c. Now how is central bank going to debit the paying bank who has zero a/c with them? So the paying bank would have to find some funds to put into their reserve a/c.

                The video seems simple, but it actually muddles beginners minds. That’s why I say discard that video.

              • Micha & chempo,

                Thanks for this discussion, you guys have had now on 4 threads. I feel like Micha’s showing-off a hot exotic dancer in micro-mini panties all oiled up, and me being not as well versed on this subject want to get lost in all that stuff. And chempo’s the voice reason, telling me, whispering, that’s a guy you’re drooling over.

                I don’t know who’s running this whole system, but I hope there’s people like chempo (and Joe), announcing ‘that’s a guy’ (an illusion).

              • Joe America says:

                That is a perfect description of what is going on. LOL LOL LOL

              • karl garcia says:

                If I am not mistaken Joe says that Micha is a he.
                RHiro calls Micha a she. As far as I am concerned, until I am corrected,Micha is a….I am confused too.

              • edgar lores says:


              • Joe America says:

                I have no idea if Micha is a he or she, and any gender reference is subconscious and inadvertent.

              • I’m not saying Micha’s the one all oiled up in a micro-mini panty, guys. I’m saying this MMT, Micha’s pimping is the exotic dancer—- chempo’s the one whispering “that’s a guy” (words of wisdom PFC Pemberton could’ve used).

                Like Odysseus and the Lotus eaters, the voice of reason helps a bunch.

              • karl garcia says:

                Did you say Lotus Eaters?

              • Micha says:

                “Video explanation is not wrong…”

                Ladies and gents, chempo the banker says the video is perfectly clear and correct. The universe makes sense. There is hope for mankind. He finally gets it.

                Or did he?

                “… the question remains where is the funds coming from?”

                Incredible. He’s been asking this question a million times and the answer stares at him plainly and clearly in a video explanation he acknowledges as “not wrong”, but for some reason still missed it.

                chempo, chempo.

                When the bank approved that loan, an account on Robert’s name was simultaneously created. From out of nowhere, there’s now $10,000 on his account. The bank did not harass an ageing pensioner and a lotto winner to deposit their money so they could have that $10,000 lent to Robert. The bank merely typed numbers on Robert’s account and viola, $10,000 is there for Robert to spend anywhere or whichever way he wants.

                Now, when Robert proceeds to use that money to buy stuff at, say, Home Depot, how is the bank going to process the payment? Simple. By electronic instruction, Home Depot’s account at bank B is credited and Robert’s account is marked down by corresponding amount. Before the transaction there was $10,000 on Robert’s account. After the transaction there is $0.

                Before the transaction, Home Depot’s account at bank B has $50,000. After the transaction, there’s now $60,000.

                After that transaction, the total money supply in the broader economy expanded by $10,000; created by the bank and spent into existence by Robert.

                Are you following this Mr. Banker?


                Central banks could pump commercial bank reserves through quantitative easing, a process famously described by Ben Bernanke as merely sending electronic instructions to mark up their account balance; a process, further, that is not dependent on generated taxes or income.

              • Micha

                May an accountant but in? In our world, we have not encountered an ex nihilo thing. Only God can create out of nothing. For every action, there is an opposite reaction. In accounting, for every debit, there should be a corresponding credit for our work to be balanced.

                In your example, when Robert got his 10,000 loan approved, even if it.s by a keystroke, the bank debits Notes Receivable and credits its account. So they increased an asset (Note Receivable) and decreased another asset (their Cash or current Account. Let’s just say that the 10,000 is part of the bank’s capital, from stockholders’ response to call-in.

                Robert, in his personal account gained 10,000 in Cash and records Notes Payable – Bank ABC. Ok, so he goes to Home Depot and gets an item, he issues a check and gets what he purchased. He got his goods, (a debit to capital asset) his checking account got credited, but he still has Notes Payable to Bank ABC.

                On the due date, Robert pays the bank, so his Note Payable is cleared, and his cash (let’s say the income derived from the item he got partly from his asset he purchased from Home Depot) was reduced by that amount.

                In the Bank ABC’s books, upon receipt of Robert’s payment, they debit their current account and credit the Notes Receivable. The circulating money did not change…but the goods and services did..maybe by the amount of income derived by the bank in interest, and the income earned by Robert, if he invested his loaned money and earned from it, but they did not come from nowhere, it was sourced from the business generated from the loan transaction and from the clients of Robert.

                The bank began with zero deposits, but they had capital to begin with, when Robert, their very first client got his loan approved. If another bank has performed that keystroke, then an interbank loan is created, and Bank ABC has a Note Payable to that other bank, instead of decreasing their current cash level.

                My simple understanding on how the bank helps the economy wheel to continue turning.

                In here, only the regulators get to decide whether to increase money in circulation and they have guidelines to help them decide when and by how much to prevent a run away inflation.

                IMHO, our banks are not allowed to create money ex nihilo without ithe The Monetary Authority’s knowledge or approval which is a semi-MMT or practicing monetay sovereignty.

                Now don’t bite my head off here, my disclaimer as always is that am not an economist nor a banking expert and have not the time to read up on their books and my internet speed would not permit me to play videos while commenting.

                When I see, Mary, Mary, I will run for cover….joke, hahaha!

              • chempo says:

                May I ask you a very simple question?
                If Robert comes back to his bank that loaned him the 10,000 and which he knows he has it cos he had seen it in the ATM,, he goes to the teller and ask for his 10,000 in new peso notes….where is the funds coming from? Will the teller give Robert a keystroke or cash? If cash, where will the cash come from?
                All other matters blurs your vision. Just look at the Teller and Robert solve the problem. Cash or keystroke? Wait a minute, he has already been given the keystroke when the loan was extended, right? So the Teller should ask Robert to get lost, he has got his money already?

                There are 3 issues — loan, money creation and funding.For loans, talk to the loan manager, for money creation talk to the economist (you’re the expertise here), for funding talk to the treasury manager.

              • Micha says:


                I appreciate your accountant’s perspective. It is helpful but, by its qualifier, limited. Question : Does the loan manager consult their bank accountants when they make decisions to approve a loan?


                This thread is already getting way too deep, so for convenience just post your reply at the bottom page. It didn’t help that Lance Corporal X made a nice sexist comment which is totally unrelated to the discussion on the nature of modern commercial banking.

              • Micha says:


                Oh. My. Gawd. Why would Robert bother going back to the bank and demand cash when he could very easily log in to his computer at home, access his bank’s website and make direct payment to the bank of whoever he owes money? That is the essence of modern digital electronic banking.

                For home mortgages for example, Robert won’t even see that money. It will get directly transferred to his realtor’s bank account. Ditto with car loans.

                In this day and age, who still goes back to their bank and demand cash for their loans? Maybe in the 1980’s some people do that when computers and internet are still a rarity.

                Have you applied for a loan lately and actually demand cash for it?

              • chempo says:

                Micha when was the last time you stood behind a bank’s teller queue and see people encashing checks? Sorry. we are far from being a cashless world yet.

                You think in Philippines all those ‘Representation’ payments were made by checks or bank transfers?

              • Micha says:

                chempo I am talking about loans being converted into cash by the borrower as you have queried.

  15. karl garcia says:

    This is about Fractional Reserve Banking

    “Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, and holds reserves that are a fraction of its deposit liabilities.[1] Reserves are held at the bank as currency, or as deposits in the bank’s accounts at the central bank. Fractional-reserve banking is the current form of banking practiced in most countries worldwide.[2]

    Fractional-reserve banking allows banks to act as financial intermediaries between borrowers and savers, and to provide longer-term loans to borrowers while providing immediate liquidity to depositors (providing the function of maturity transformation). However, a bank can experience a bank run if depositors wish to withdraw more funds than the reserves held by the bank. To mitigate the risks of bank runs and systemic crises (when problems are extreme and widespread), governments of most countries regulate and oversee commercial banks, provide deposit insurance and act as lender of last resort to commercial banks.[1][3]

    Because bank deposits are usually considered money in their own right, and because banks hold reserves that are less than their deposit liabilities, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money originally created by the central bank.[1][3] In most countries, the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios. This can limit the amount of money creation that occurs in the commercial banking system, and helps to ensure that banks are solvent and have enough funds to meet demand for withdrawals.[3] However, rather than directly controlling the money supply, central banks usually pursue an interest rate target to control inflation and bank issuance of credit.[4]”

    • chempo says:

      Yes Karl, it is like I said.

      The reserve serves like a pooling of all banks reserves at the hands of the central bank so it can use this funds to come to the rescue of a bank run. But they act only if the bank run is a case of liquidity problems. That is, the bank having the problem because of some rumours, depositors got jittery and everybody rush to the bank to withdraw. The bank is solvent, but it just dont have the amount of cash in it’s vaults to meet all the withdrawals immediately. But if the bank is already kaput, such as Banco Filipino, central bank will not step in as lender of last resort. It’s a different story.

  16. chempo says:

    Joe, the last table you did not indicate year of the data. There is one bank that I know Overseas United Bank Phils Inc, a foreign subsidiary, which is not in the table. Been here more than 10 years.

    I’ll juggle with the figures over the holidays and see if there is anything worth mentioning.

  17. Chivas says:

    Limits to Openness (Exerpt on Automated Trading by E. Durenard)

    Trading, like dating, is a frustrating business. If you show your willingness
    too much, you are at risk of being snubbed. There is a higher probability that your prospective partner will make the first move and come and get you, if
    you do not act too eagerly. On the other hand, if you wait too long, someoneelse will come and steal your partner. After all, there is a market out there.

    Placing limit orders into the market is no different. If the order size is too
    big then the market participants needing liquidity will have the “come and
    get me” attitude. Large limit orders have the repellent effect on potential
    liquidity takers, who are then happy to wait and suddenly become more
    passive. This morphing of one behavior into another is another reason why
    there is so much complexity in the markets.

    Several studies attempted at estimating the impact of the size of the limit
    order on the probability of its being executed, and also the expected time
    to execution. As per common intuition, these studies have found that the
    probability of execution depends somewhat on the state of the order book,
    market volatility, distance of the order from the mid-price and the size of
    the order. However, the predictive power of any modeling that only uses the
    trade and visible book information is inherently impeded by the presence
    of stealth algos (like icebergs for example).

    Finding ways of hiding your intentions in the modern electronic world is no different from the tactics ofthe large and successful traders of the past and present. Some traders wouldhide and spread their size among many brokers, and while appearing to be “buying” to the trading crowd, in reality they are selling out of their largepositions via the brokers. In this way they are trying to keep the cooperative accumulation game going while trying to get out of their positions.

    The information advantage is money, and like money it is easy to lose. Hence it is only natural that with all the transparency in the world people will still try to hide their hand as much as possible within the regulatory constraints. Hence in my opinion, while many of those studies are interesting from a theoretical viewpoint, they do not necessarily help to increase profitability.”

    • Joe America says:

      I’m not sure I understand the point. That investors are gamblers, and insiders or people with really excellent computers have an advantage?

      • Chivas says:

        A mix of both. A kind hybrid of Gabriel Shear and Gordon Gecko.

        The link intends to answer the question about “How much is all there is to it?”

        The author also ventured through the Lamarckian and Darwinian ideas on financial markets that uses the work of Mendel(dna study of organism survival rates) all the way down to algo works of Holland, Koza about reproduction, mutation and selection.

        No one’s been able to predict the movement of the markets but you have a significant leverage having tools(or toys) that people sell crap 99.9% of the time. (Too many snakeoil trade system sellers out there.)

        Is the word “bank” a cover for “trading systems”, like a “website” for “applications”?

        • Joe America says:

          Hmmm, I’m not grasping the parallel. Banks that are heavily into investments are strange organisms that are probably less understood than the human brain, so they may be aliens. Websites have many different uses, and I suppose are applications, versus systems. So if you mean banks are the tools whereby people make money by leveraging information, yes, I suppose so.

    • chempo says:

      I’m not sure of the context of Chiva’s exerpt, but let me share a bit on say foreign-exchange market.

      Bank A calls up Bank B and ask what is your 3 month $/Yen?
      Bank B replies 121.15 / 121.35. Sometimes they will just say 15/35 (the 121 being understood at the point in time.
      What is the significance? —
      A does not tell B whether he is buying or selling.
      B just indicates I’m willing to sell at this rate, and I’m willing to buy at this rate. Of course if B is not really interested in selling he will quote his selling rate very high, and if he is not interested in buying, he will quote his buying rate very low.
      If A is interested in selling Yen at the quoted rate, he will confirm the rate, the delivery date (3 months) and the amount. Sometimes B may come back and say sorry can’t do that amount (maybe it’s too big for them, or their lines for Bank A has been breached) so they agree on a lower amount.

      That’s the way the game is played.

  18. Micha says:

    ““Video explanation is not wrong..””

    Ladies and gents, chempo the banker says the video is perfectly clear and correct. The universe makes sense. There is hope for mankind. He finally gets it.

    Or did he?

    “…the question remains where is the funds coming from?”

    Incredible. He’s been asking this question a million times and the answer stares at him plainly and clearly in a video explanation he acknowledges as “not wrong”, but for some reason still missed it.

    chempo, chempo.

    When the bank approved that loan, an account on Robert’s name was simultaneously created. From out of nowhere, there’s now $10,000 on his account. The bank did not harass an ageing pensioner and a lotto winner to deposit their money so they could have that $10,000 lent to Robert. The bank merely typed numbers on Robert’s account and viola, $10,000 is there for Robert to spend anywhere or whichever way he wants.

    Now, when Robert proceeds to use that money to buy stuff at, say, Home Depot, how is the bank going to process the payment? Simple. By electronic instruction, Home Depot’s account at bank B is credited and Robert’s account is marked down by corresponding amount. Before the transaction there was $10,000 on Robert’s account. After the transaction there is $0.

    Before the transaction, Home Depot’s account at bank B has $50,000. After the transaction, there’s now $60,000.

    After that transaction, the total money supply in the broader economy expanded by $10,000; created by the bank and spent into existence by Robert.

    Are you following this Mr. Banker?


    Central banks could pump commercial bank reserves through quantitative easing, a process famously described by Ben Bernanke as merely sending electronic instructions to mark up their account balance; a process, further, that is not dependent on generated taxes or income.

    • chempo says:

      You miss the point — I said the video is perfectly OK but they left out certain things, the funding part. So those with knowledge understand the video, those without knowledge are misled.

      On money creation and money supply, you are sadly mistaken.
      Firstly — when loan was extended and Robert’s current a/c credited for the loan proceeds, money was created and money supply went up at this point. Why? Because aggregate depositor balance went up by 10,000
      Secondly — when Robert transact at Home Depot, nothing happens — no money creation, no increase in money supply. Why? Because Robert’s current a/c goes down, but Home Depositor’s current a/c goes up — net net no change in aggregate depositors balance and money thus no change in money supply.

      Is that the end of the story? What is the liability of lending banK to Home Depot’s Bank? Nothing? Wow we really live in a world of free money. So by keystroke at the central bank, the reserve a/c of lending bank is debited and Home Depot’s bank is credited? Right — agreed. That means lending bank now owes central bank 10,000. Let’s imagine the sum is not 10,000 but 10,000,000,000. So now lending bank owes Bangko Sentral 10,000,000,000. Tomorrow lending bank goes burst — taxpayers foot the bill?

      Apparently you did not digest my lenghty illustration in above prior comments..

      • Micha says:


        On money creation and money supply, this is what I’ve said : “After that transaction, the total money supply in the broader economy expanded by $10,000; created by the bank and spent into existence by Robert.”

        There might be a glitch in the tilmeline in the way I formulated that sentence but yes, it started when the bank created (approved) the loan.

        On funding the loan (for the nth time), this is what you said : “That means lending bank now owes central bank 10,000.”

        The central bank marks down the lending bank’s reserves which, as I have noted in my postscript above, per Ben Bernanke’s admission, they (the central bank) could also mark up just by sending electronic instruction. No taxes or income or savings needed.

        Lending banks do not normally exceed the amount of loan they give out over and above what they have in their current reserves. But, as in the case of the 2008 financial crisis, some mega banks over extended their ability to lend and they have to be rescued from their greed. Sadly though, both the ability and the greed is still there and it’s just a matter of time before the next crisis strike. Unless…we reform the banking/monetary system, take away the money creation ability from these mega banks and return it to its old, boring, traditional function. Money creation should be restored to a public, transparent, and accountable body.

        • I agree wholeheartedly most specially on the last 2 sentences.

          • Joe America says:

            One ought not throw the baby’s parents out with the bath water. Domestic banking inspired the rise of investment banker (the baby), and, indeed, “greed”, shortsightedness and regulatory failings led to the crash of 2008, as loose real estate lending did in the collapse prior to that. To consider all bankers as greedy is to consider all businessmen and women (including yourself) greedy for agreeing nto work for those competing for profits. The parents of the baby have, over the years, been instrumental in putting together those needing funds with those having them, and without that function, the US would still be cowboys and Indians. Now, as the planet gets burned up and we come to clashing over resources, we may agree with the Lance Corporal that austerity is better, but that’s like wishing history had a different writer. It doesn’t change what we have, how we got here, and only hyper-moralists find fault without delineating solutions that work. By work, that means creating general good and good will, versus shock and slaughter.

            • Micha says:

              Joe, the key word here is reform and restore.

              • Joe America says:

                I agree with the principle, but would withhold judgment until knowing the specific proposals. If they refine and build, great. If they destroy, not such a good idea. NPA has similar ideas, but I’ve never quite understood how blowing up electricity towers or shooting AFP troops bringing in storm relief goods gets us very far.

              • Micha says:

                Here is one proposal for a start:

            • Micha says:

              Please understand those words before you say “bath water”.

            • My agreement with Micha stems from my belief that the 2008 financial crisis came from over exposure of the banks to risky investments. If my memory serves me right, their banks have traded each others’ investments in real estate not realizing that the mortgaged properties are not worth that much, or something to that effect. I hope to read up more on the background to further understand what led to the crisis.

              Fortunately, based on my shared link above, the Philippine banks are traditional and compliant with the CB regulations, so we are somewhat shielded from regional financial crisis, that is, hoping that chempo’s warning on possible local real estae bubble will not come about.

        • chempo says:

          “Lending banks do not normally exceed the amount of loan they give out over and above what they have in their current reserves”

          Banks do not operate like that.. In the realm of wholesale banking, we are talking of large loans, like for the PPP projects, each drawdown is in hundreds of millions of $, in pesos it’s billions, you telling me banks have that sort of money in their reserves waiting for their borrowers to draw down?. The free floats they keep in their reserves will kill them because it’s not earning them money whilst on the liability side they are paying out interest. Take my advice, retain the services of the Treasury manager and pay him big bucks to manage the funding part of the business. You need to operate on the basis of “Just-in-time” as far as fundings are required.

          • Micha says:

            There goes the myth of bank deposits funding bank loans.

            Robert B. Anderson, Treasury Secretary under Eisenhower, said it in 1959:

            “When a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposits; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.”

            The Bank of England said it in the spring of 2014, writing in its quarterly bulletin:

            “The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”

            “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

            All of which leaves us to wonder: If banks do not lend their depositors’ money, why are they always scrambling to get it? Banks advertise to attract depositors, and they pay interest on the funds. What good are our deposits to the bank?
            The answer is that while banks do not need the deposits to create loans, they do need to balance their books; and attracting customer deposits is usually the cheapest way to do it.

            Ever since the Federal Reserve Act was passed in 1913, banks have been required to clear their outgoing checks through the Fed or another clearinghouse. Banks keep reserves in reserve accounts at the Fed for this purpose, and they usually hold the minimum required reserve. When the loan of Bank A becomes a check that goes into Bank B, the Federal Reserve debits Bank A’s reserve account and credits Bank B’s. If Bank A’s account goes in the red at the end of the day, the Fed automatically treats this as an overdraft and lends the bank the money. Bank A then must clear the overdraft.
            Attracting customer deposits, called “retail deposits,” is a cheap way to do it. But if the bank lacks retail deposits, it can borrow in the money markets, typically the Fed funds market where banks sell their “excess reserves” to other banks. These purchased deposits are called “wholesale deposits.”

            Note that excess reserves will always be available somewhere, since the reserves that just left Bank A will have gone into some other bank. The exception is when customers withdraw cash, but that happens only rarely as compared to all the electronic money flying back and forth every day in the banking system.

            Borrowing from the Fed funds market is pretty inexpensive – a mere 0.25% interest yearly for overnight loans. But it’s still more expensive than borrowing from the bank’s own depositors.

            That is one reason banks try to attract depositors, but there is another, more controversial reason. In response to the 2008 credit crisis, the Bank for International Settlements (Basel III), the Dodd-Frank Act, and the Federal Reserve have limited the amount of wholesale deposits banks can borrow.


            • chempo says:

              Bank of England has not a reserve ratio regime, so there is no reserve requirement. It’s a different kettle of fish from Bangko Sentral which imposese a 20% reserve ratio.

              Micha, we agree banks create money, but we differ how. You said they create money when they create loans, I said they create money when deposits are created. That’s a whole world of difference. If BDO loans a billion peso to MRT for purchase of train coaches, but MRT request for loan proceeds to be paid to Dalian, China. There is no money creation. Instead, money went out of the economy.

              Where loans led to some credit a/cs being credited, then yes, money is created, money supply goes up.

              Now tell me, billions of pesos have been created by banks, where do they go. People cash in, cash out, draws checks, deposits checks, so where do they go? They go back to banks in depositors a/cs. So those billions end up with banks, what do they do? What do they do?

              You do not comprehend money creation and funding are separate matters.No amount of real world explanation can convince you. I leave you happy in your thoughts that your views are correct.

              You are cutting snippets of comments from high authorities who are describing only part of the story. If you still don’t comprehend, it’s ok. You have been reading too many economists, I suggest you go out and buy a Banking 101 book for Xmas..

              • Micha says:

                Hahahahaha…we’re making great progress here chempo. If I remember correctly, we started this conversation some months ago with you vehemently insisting that banks make loans out of depositors money. And look at you now, basically agreeing with me that banks create money by giving out loans instead. I guess your protestation about “funding” is just a leftover pride when you swallowed part of it by acknowledging the MMT and Positive Money view.

                So no, between the two,of us, it’s you who needs some new banking education.

              • chempo says:

                Micha please stop this.

                I used the credit expansionary model — its a mathematical model, do u understand that?
                Because we started off just talking about that model.
                Then we moved into funding, because for you there is funding by bank, just create loan and credit current a/c that’s all.
                So when talking funding I brounght banks funds from deposits. capital, bank borrowings etc.

                And I still do not say banks increase money by extending loan. I say money is created from loans ONLY when the proceeds is by way of crediting to a current a/c. Let me ask you again, which you have always avoided, what happens if the loan for the MRT coashes of billions of pesos is to pay Dalian, China?. You have a loan, where is the money created? Loan proceeds is remitted outside of the economy.

                The 3-Simple changes video you presented, a great MMT idea, is a figment of somebody’s imagination. One simple question to you — if it’s so simple, why is nobody practicing it? When is Governor Tentangco so stupid not to adopt it? I guess all central bankers in the world must be stupid right?

              • Micha says:

                “One simple question to you — if it’s so simple, why is nobody practicing it?”

                Simple again uncle chempo, private for-profit banks don’t want reform, much less restoration of public banking.

              • chempo says:

                Private does’nt want many things, but the govt legislate them. We don’t want taxes, but we pay nevertheless.

                Come one Micha. you can come up with a better answer than that.

                If money is free and Tetangco is not giving it to us, and we blame it on banks? And by the way, listed banks are not private, they are public enterprises.

              • Micha says:

                Tomorrow again uncle chempo, it’s nearly midnight from where I am.

            • chempo says:

              My curiosity was piqued, so I did a check on the site and true enough, the authour is not a banker, and wow…she is not even an economist, nor accountant….she is an attorney!

              • Micha says:

                That’s right chempo, more and more lay people are now increasingly aware how banks create money. Banking is too important to be left to bankers.

                Ellen Brown is the founder and president of the Public Banking Institute, a nonpartisan think tank devoted to the creation of publicly run banks. She is also the president of Third Millennium Press and is the author of twelve books, including Web of Debt and The Public Bank Solution, as well as over 200 published articles.

              • chempo says:

                Ellen cannot get a well-paid job as top notch banker ends up creating her own quasi bank-like office. 200 books don’t impress me. Best writers in the world authors only a handful of books in their life time.

              • Joe America says:

                Thanks. I appreciate this read, which finally gets to the root of the matter, that Ellen and Micha consider banking to be a fraudulent business because a bank’s liabilities are not really owned by the bank, but owed to the depositor. Then the banks go and lend money, and earn profits, on the basis of what they owe, which completes the fraud cycle. It is seen as a massive ponzi scheme that builds a whole money making industry on nothing but promises and sleight of hand. Thus, because bankers SHOULD be aware they are doing this, but continue doing it, they are greedy peddlers of a criminal mind-set (leading to Micha’s dripping condescension toward these thieves, the bankers).

                The problem is, they (Ellen and Micha) have no solutions to propose that anybody in authority accepts. Because the NEED for such intermediary services and risk taking exists, and, without it, banks would not exist. People need a secure, convenient place for their money (which they can keep in Los Angeles and withdraw in Hong Kong), and businesses thrive by borrowing to build and grow their own profits, and people borrow to have today what they could otherwise not get for years ahead (a home or car). People need risk takers and intermediaries of money, and accept that they are due a decent profit for taking it. Who cares if it is an asset or a liability except for the accountants and pundits?

                The trick is keeping that risk above board and within reason, the failure of which has led to prior economic melt-downs.

              • Micha says:

                I’ll take a look at that review tomorrow. Ellen Brown is an advocate for monetary reform and the American Monetary Institute is on the same page with her. That review came out in 2010. Her article I posted above is dated Oct. 2014. I’m sure she had since acknowledged the points raised in that review.

                The bigger picture here is that there is an increasing awareness among greater number of people for monetary and banking reform

              • chempo says:

                Joe, it’s something like this:

                A man in a hot air balloon realized he was lost. He reduced altitude and spotted a man below. He descended a bit more and shouted, “Excuse me, can you help me? Can you tell me where I am?”

                The man below replied, “You’re in a hot air balloon hovering approximately 30 feet above the ground. You’re 40.5 degrees north latitude and 59.5 degrees west longitude.”

                “You must be an accountant or banker?,” said the balloonist. “I am,” replied the woman,
                “How did you know?”

                “Well,” answered the balloonist, “everything you told me is, technically correct, but I’ve no idea what to make of your information, and the fact is I’m still lost. Frankly, you’ve not been much help at all. If anything, you’ve delayed my trip.”

                The man below responded, “You must be in Economist?.” “I am,” replied the balloonist, “but how did you know?”

                “Well,” said the man, “you don’t know where you are or where you’re going. You have risen to where you are due to a large quantity of hot air. The fact is you are in exactly the same position you were in before we met, but now, somehow, it’s my fault.”

              • Joe America says:

                Hahahahaha, yes. It is something like that. 🙂

              • karl garcia says:

                Chempo ROFLMAO 😜😳🙄😎

              • caliphman says:

                Ummm chempo, do not hold your breath but that critic of Ms. Brown is by no self-respecting economics or banking expert either.The American Monetary Institute is the theoretical thinktank behind the banking and monetary reform platform of US ex-presidential Green party candidate Dennis Kucinich. If the name does not ring a bell, he was known as that once young congressman who had a close encounter with a flying saucer while visiting the home of Shirley MacLaine in Hollywood. The AM Institute was founded and is headed by Stephen Zarlenga, Phd. But unfortunately the PhD is in Psychology and he never used it as he embarked on an insurance career before becoming an independent researcher and prolific writer on money and banking. That we are discussing the critique of a book on money and banking by an author when both are not professionally qualified to be experts in this area is really sad. If MMT is the backwater of mainstream macroeconoics, these writings must represent the swamp waters which might explain the bizarre banking and money ideas percolating in its muck.

              • chempo says:

                hahaha thank you Caliphman.
                I went through part of Ellen’s stuff and I gave up at some point for it’s erring ways.
                Must confess I did’nt research Stephen Zarlenga. But that critique piece was acceptable it it’s observations.

                Perhaps getting a psychologist to critique an attorney was a smart move after all haha…

                But anyway, with due respects to all learned people whatever their background, I have no intention of refuting economic ideas of any kind. I just wanted to assert only in one small area where I have the expertise, beyond that, I’m just a road sweeper.

  19. Question : Does the loan manager consult their bank accountants when they make decisions to approve a loan? – Micha

    Most probably, he doesn’t as there’s no need but it follows that at the end of the day the accountants stay at the bank to prepare the daily bank reports for submission to the regulatory bodies, the Central Bank for one. They need to prepare the financial statements and they need to balance everything. I had a friend who had to stay all night at Metrobank office when they could not balance everything, he could not take the daily OT so he resigned and came back to the company. I worked for a financing company, a non-bank financial intermediary, engaged in quasi-banking functions, and boy oh boy, were we really monitored. Daily FS, summarized on a weekly manner for submission to the CB… they do that to smaller financial intermediary, how much more to unibanks?, They are closely monitored, believe me. Any violation will result in heavy penalties, I presume.

    • chempo says:


      A loan manager is just a cog in a bank’s machinery. She works within parameters established by the bank’s ALMC.

      Micha’s idea of a loan is always just credit to borrower’s current a/c. That is hardly the case. In the case of term loans, drawdowns are usually defined in loan contracts, the manner, the timing, the term (rates/periods, etc).Impending drawdowns are always pre-notified, so Treasury knows when he needs to get his funding ready.

      In the case of current a/cs, nobody in the bank will know when depositors will issued their checks and how much, so the clearing system works in a way that at a certain time before the close of business each day, banks know what is their position at their reserve a/c at the central bank. They will then quickly borrow short term, mostly overnight, to beef up their reserve a/c, or if they are long (means excess funds in their a/c), they will lend it out in the money market, otherwise they sit on useless free floats.

  20. Chivas says:

    I was a bit of a copy-paste referrer in previous comments only to support or articulate the exact point only to make an idea richer. I worked at a bank in UK for loans service. Let’s avoid calling a banker a person who works or have worked in a bank, because, doh.

    “What we have, as chempo has noted, is two different perspectives. One, economic. That is yours. The other, business. That is mine. The economic perspective is valuable for those who set monetary policy and rates, and is not something everyday bankers need to get distracted about. ”

    This comment makes perfect sense. Like a master chef won’t care how the restaurant is managed as long as he can perform his job well: preparing meals that don’t suck.

    I previously posted a trading business that suggests an illustration of only two kinds of data out there: the price data(how economists see) and fundamental data(how investment bankers see).

    A manager told me: “I don’t care what you do at home, be it sacrificing animals for Satanic rituals or having a sideline of pet therapist, as long as you can produce, we got no problem.”

    Bankers know combinatorics. They frequently ask about “how much”, “how many times”, “what chances”, “Is it probable to”, when you do that, you’re in combinatorics, and when you’re in that zone, you’re into counting because the main job of any banker is to recognize and capitalize from risk. Be profitable, be an ego manager(observing how you see yourself), be clear-headed and have a predator mentality.

    The central question I see on the thread is this:
    “Where does money comes from?” Answer: Cosmos.

    A grumpy professor can answer: “Depends on how you see it, kid.”
    A CEO of bank can reply: “What’s next? Where do I get a divorce?”

    You can sell poop and make money from it, then sellers tell you money come from shit.

    “Where does money comes from?” In a programmer perspective, you have to define first what exactly “where”, “does”, “money”, “comes” and “from” means. That’s not defining about parameters yet. Until you have assumed you are wrong before you prove you are right, you are still in an artificial end state.

    Genghis Khan didn’t dole out any high-fives on his enemies, he goes out there, find things out, and prove he is right: killing the king, making his daughter a wife(not saying he is cool but at the moment in time he probably has no choice).

    The same it is to people who can cook, who can write well, play great music(like the band “Tool”) and everything that requires “hands-on” experience, the highs and lows is golden.

    If you’ve never asked yourself a question why that investment manager gets to smile like a croc or even flirt on cool celebrities through portfolio charades, while you work your ass off diagramming an ops, creating algos, answering on few drunk customers why it is in their interest to have Peso denominations, your argument can have a mild missing piece.

  21. Micha says:


    Please note that the AMI review of Brown’s book is dated 2010 and it’s most likely that Ms. Brown has since re-calibrated or fine tuned her position on the matter. She and AMI are natural allies in the advocacy for reforming the currently skewed monetary system.

    • chempo says:

      OK Micha noted.

      As with most things in life, the monetary system is not perfect, but I don’t subscribe to the idea that it is skewed, especially not in the way you described. The imperfection is not in the system itself but deficiencies on the part of the regulatory bodies.

      The monetary system is part and parcel of the economic system which strives best in a free market environment, but subject to regulatory monitoring, of course. In a free market, profit is the critical driver, the motivation that ensures efficient use of resources. All those past crashes in the market is a culmination of various factors, greed being one of them, but it’s the failure of regulatory institutions to read the market well and take the necessary cooling steps well ahead of time. Part of the failure is certainly of a political nature.

      In any economic market we need risk takers, we need people who will provide liquidity for the market, we need people who take longer term view of their investments, and we need several sideline but no less critical players, the ones who provide services that make the wheels of the system turn as smoothly as they can.

      A positive criticism is well worth its salty sting if one offers healthy suggestions. The last few I saw were suggestions from the extreme left of leaving money creation and banking in the sole hands of the government. Unless we are happy to re-institutionalise communism, I’m unable to see any benefits going into that direction. As for me, I feel current system can be improved in 3 ways – (1) Having a politically independent central bank that is professionally well managed with people who are attuned to current market developments, the ones who can read the market well and have the guts to take pro-active steps to forestall cracks in the wall, (2) There should be a sort of committee composing of regulatory and market representatives to study new financial products before they are introduced, (3) Separation of commercial and investment banking should be reviewed. Commercial banking should not be into excessive trading for their own a/c.

      • Micha says:

        1. The regulatory power of government had already been bought/arranged/co-opted/tilted in favor of the money brokers. Haven’t you heard of the Citizen’s United case yet? Corporations are now people according to Scalia. Revolving door policy between Goldman Sachs, CitiCorp, and federal regulatory agencies does not anymore raise an eyebrow. Corporations and mega banks now owns the world, so don’t be naive about regulatory deliverance.

        2. You said, “A positive criticism is well worth its salty sting if one offers healthy suggestions.”.

        And there are suggestions uncle chempo, you’re not just paying close attention.

        3. “The last few I saw were suggestions from the extreme left of leaving money creation and banking in the sole hands of the government.”

        If you’re classifying Randall Wray and others from MMT as “extreme left”, you don’t know shit about what is left and right in the political spectrum.

        • chempo says:

          (1) Your point is really funny. It is a point I made, that a major problem lies in weak regulators. So when we have weak regulators, we change the whole system, instead of addressing the weakness?. When we have a flat tyre we change the tyre or fix the hole, we don’t change the car.

          (2) And your suggestion is leave everything in the hands of the govt. The govt will extend commercial loans. When business goes burst, taxpayers foot the bills.

          (3) Agreed I don’t know shit. I know only what I read. And I read take money-creation from bankers’ hands and let govt do it.

  22. karl garcia says:

    “In this interesting video Federal Reserve Chairman Bernanke basically says that idle balances don’t chase goods and services and that a fortiori we don’t have to be overly afraid that quantitative easing will spill over into inflation. And – which actually is the most interesting part of the speech – he also confirms the Modern Monetary Theory view that the financing of these operations is made possible by simply crediting a bank account and thereby – by a single keystroke – actually creating money.

    One of the most important reasons why we’re still stuck in depression-like economic quagmires is that people in general – including most mainstream economists – simply don’t understand the workings of modern monetary systems. The result is totally and utterly wrong-headed austerity policies, emanating out of a groundless fear of creating inflation via central banks printing money, in a situation where we rather should fear deflation and inadequate effective demand.”

    • chempo says:

      Karl … the bottomline of this quote is …lets make the US$18 trillion debt larger.

      Old school taught us that Production=Resources+Labour+Capital.
      Capital being money you put aside through hard work and denied spendings.

      Now technology gives us keystrokes and says hey you don’t need hard work anymore, no need to scrimp and save. Our deeply ingrained sense that nothing is for free is challenged.

      But it’s a world of cause and effects. Something that is for free has consequences. Debt balloon will expand to infinity, till the $ comes home to roost. It’s a natural phenomenon that something that is free will simply proliferate, and something that is in demand, but once in oversupply quantity, has no value. It’s simple logic, critical thinking not necessary. The only thing that is in demand and is free is oxygen.

      Nobody questions the logic of putting more liquidity into the economy when the market is tight. But the liquidity you pump into the market has got to be from money that you have put asie. Keystroke money creation also creates debt one way or another, but it’s the side of the equation that many do not wish, or are unable to see. Many are those that ask debt? what debt? Keystroke them away.

  23. karl garcia says:

    “Another “Print Your Way to Prosperity” Mindless MMT Proposal
    by Mike Mish Shedlock • March 20, 2014

    The Fed’s tapering merely slows the growth of its balance sheet. The authorities would still have to sell $3 trillion of bonds to return to the pre-crisis status quo.

    The rarely admitted truth, however, is that there is no need for central banks’ balance sheets to shrink. They could stay permanently larger; and, for some countries, permanently bigger central-bank balance sheets will help reduce public-debt burdens.

    If central bank holdings of government debt were converted into non-interest-bearing perpetual obligations, nothing substantive would change, but it would become obvious that some previously issued public debt did not need to be repaid.

    This amounts to “helicopter money” after the fact. …

    Permanent monetization of government debts is undoubtedly technically possible. Whether it is desirable depends on the outlook for inflation. Where inflation is returning to target levels, debt monetization could be unnecessarily and dangerously stimulative. Central-bank bond sales, while certainly not inevitable, may be appropriate. But if deflation is the danger, permanent monetization may be the best policy.

    Theory vs. Practice

    Anyone with an ounce of economic common sense will quickly realize Turner’s scheme as just another mindless “print your way to prosperity” proposal.

    Monetization of government debt is undoubtedly technically feasible (at least until it isn’t) as Bernanke has shown. Yet it promotes a “free lunch” mindset that government debt simply does not matter.

    Common sense suggests it cannot work. History shows the same thing.

    All sorts of useless projects have already been funded based on “free lunch” idiocies. And every time massive economic distortions occurred due to lack of valid price signals.

    Anything and everything seems doable.

    Want high speed trains from every city in the US to every other city in the US? Want $100 minimum wages? Want a chicken in every pot?

    All of those are “theoretically” possible (for a while) along with funding manned space missions to Jupiter, free healthcare, and even free college education for the masses.

    “Practically” speaking, such idiocy has already been tried numerous times. The results speak for themselves: numerous wars, and economic bubble after bubble, each larger than the one that preceded it.

    So along comes Adair Turner, proposing a step-up of clearly failed policies.

    Gong Show of Cacophony

    Want another opinion on this subject? Dave Stockman has an interesting take called Fed’s Taper Kabuki is Farce; Gong Show of Cacophony, Confusion and Calamity Coming.

    Some call label Turner’s proposal Modern Monetary Theory (MMT). I label it Keynesian idiocy on steroids.

    Mike “Mish” Shedlock

    Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.”

  24. dahlia says:

    Hi Mr. Joe! Thanks to a very positive reviews you have done with BSP, but, I am quite interested on knowing how does a bank operates? Especially on who determines the cash requirements they need to maintain in the vault? And how precise can they manage to accommodate withdrawals done on a day so that the bank may not become short of what their clients may need.

    • Joe America says:

      The cash needs of a branch are determined by historical demand and known patterns based on, say when paydays are or holidays occur, plus a reserve. The whole bank’s needs are determined pretty much the same way. There is a central operating unit that is responsible for knowing these matters and keeping branches supplied. It is not exact, and branches will run low if demand is much higher than expected. But there are ways to fix that with emergency shipments of cash.

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