Students Across the Nation are Planning Something Unprecedented to End Student Debt Forever

[Recursion]

131. Looking back, I wrote that really badly.

Last edited Fri Oct 2, 2015, 11:35 PM - Edit history (1)

On your understanding, is there any adverse consequence to a bank that makes a loan that goes bad?

Sure, they lose out on the interest they were expecting, for one.

If that were true, banks would delight in lending to, for example, high-risk-high-reward startups.

Sounds like a decent description of 2007....

Can you provide a citation for the proposition that major banks don't use double-entry bookkeeping?

Sorry, I realized I was saying that entirely wrong. They use it internally all the time. When they originate a $10K loan, they enter $10K to their assets (the loan) and $10K to their liabilities (the deposit account they put it in), so that sums to zero like everything else. That $10K account deposit becomes a car (or whatever) and so disappears from their liabilities pretty quickly; the $10K asset of the loan disappears as it is paid off (along with interest, which goes to the bank's capital). In this sense the principles of double-entry are violated, since they should go away at the same time, but AFAIK they still use it (and that "carrying" difference is where their assets come from). If the government were to cancel that asset (the loan), then that would be a loss to the bank, but it's (presumably) combined with a simultaneous cancellation of that hold on their reserves (ie, if the $10K loan is cancelled, the bank can now loan out $10K more than it could yesterday). The breaking of double-entry happens with their reserve account (because a $10K loan cancels $250 of reserve deposits, not $10K), not within the bank itself.