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

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 26 October 2018

Staff Working Paper No. 761

By Zoltan Jakab and Michael Kumhof

In the loanable funds model that dominates the literature, banks are nonfinancial warehouses that receive physical commodity deposits from savers before lending the commodities to borrowers. In the financing model of this paper, banks are financial institutions whose loans create ledger-entry deposits that are essential in commodities exchange among nonbanks. This model predicts larger and faster changes in bank lending and greater real effects of financial shocks. Aggregate bank balance sheets exhibit very high volatility, as predicted by financing models. Alternative explanations of volatility in physical savings, net securities purchases or asset valuations have very little support in the data. 

PDFBanks are not intermediaries of loanable funds - facts, theory and evidence

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