Money, Credit, and Crises by Nektarios Michail

Author:Nektarios Michail
Language: eng
Format: epub
ISBN: 9783030643843
Publisher: Springer International Publishing

Non-performing Loans and Bank Balance Sheets

Thus, the big question is how banks are affected by these non-performing loans and why should we care. The answer is straightforward.

As you can remember from the previous chapters, banks create lending and deposits at the same time. In Fig. 7.1, a new loan worth €60 was created, with a corresponding increase in deposits. The increase in deposits will not be found in the bank’s books once the loan balance is withdrawn from the bank, as it will be removed with a corresponding decrease in the banks currency (cash) by €60. This would happen regardless of whether this is a cash or a cashless transaction, given that it simply refers to the available liquidity of the bank. As the reader may infer, given that the period a loan being granted and withdrawn is short, this increase in deposits will not be usually found in the bank’s balance sheet. It is simply depicted here for illustration purposes. As soon as the loan is withdrawn, this money will enter the system as a form of “new deposits”, which will increase the total amount of total deposits in the country, but they will, at the same time, decrease the amount of deposits in the said bank (Fig. 7.2). As we also discussed before, if just one bank exists in the system, then this amount will definitely return to that specific institution.

Fig. 7.1Bank balance sheet when a loan is granted

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