I’m not sure this is correct. I’ve always understood that banks do not lend depositor’s funds, contrary to the commonly held belief: the purpose of deposits is to keep the payments system in positive balance, and to meet any reserve requirements (and possibly new Basel 3 liquidity requirements).

Banks “create” the money they lend out of thin air, and the only constraint on that process is the Basel rules, that is, the leverage ratio of the bank’s loans over the bank’s capital (with some flexibility allowed for different classes of capital and risk weightings for different classes of loans).

The interest paid to depositors is a cost but easily recovered I imagine by the bank’s bond traders.

Banks perpetuate the myth that they are just intermediaries because they want us to believe that their only reward is the small spread between deposit rates and lending. Same observation re the return on their “assets”, assets being (in the upside world of bank accounting) the value of outstanding loans, all secured.

Without including all of the social system there is no certaincy that the use of this model will give the true results or effects, after the introduction of new policy changes. The full model which should be used here is available in Google Images:
DiagFuncMacroSyst.pdf

where all of the Smithian effects are included with some more necessary terms too. It should be noted that it is not necessary to make the model more complicated than this but it is also important not to over-simplify it. This model that I use has the absolute minimal number of entities and money flows to fully describe or cover our social systems. Consequently I find that any result comming from the simpler model illustrated in the blog, is likely to be incorrect.

A nitpick: The Government to Commercial banks and Commercial banks to Government arrows are somewhat hard to connect to the right labels. Is the red Loans (text above Central bank) or Excess reserves? Does Interest payments refer to the blue Government to Commercial banks or to the yellow Central bank to Government arrow?

To be clear: I did figure it out, but first I cold not find the label for Government to Commercial banks. So moving the labels for greater clarity would be good. Perhaps outside the arrows instead of inside?