7 August 2007
FT Alphaville » Blog Archive » Lombard Street Research - potential for “major stress” in US banking: "Banks are profit-maximising institutions that are the originators of liquidity through the expansion of their balance sheets. Two factors restrain their ability to expand: the need to hold some cash and the capital/asset constraint. A central bank influences the supply of money though its hold on the banks via the cash requirement, as at the end of the day only it can physically print money if there is a run on the banks. Central banks provide the banking system with liquidity at the rate of interest that they set. However, in normal circumstances the capital/asset constraint plays a more important role in banks’ decision to lend. Bear in mind that for banks, as profit-maximising institutions, lending at any rate is better than not lending at all if they have the capital. Of course they have to factor in risk."