Notes on Banking and Central Banks

I know this website attracts a lot of readers who are interested in banking and in monetary policy. Often, these people are regular members of the public trying to understand what’s going on in the world but starting out from a somewhat hazy understanding of the various technicalities. So (hopefully without being too patronising) I thought I’d point people towards the course webpage for my UCD module “International Monetary Economics.”

This is a final year undergraduate module that covers banking, financial stability, monetary policy and some issues in international finance. Probably most readers will find the material pretty basic but for those of you who would like to have some material to study, it’s intended to help those with a limited background get up to speed with current events in banking and monetary policy. The focus is largely international but Irish banks get the odd shout out. This is the first week of classes (out of a total of twelve), so I’ll be adding lecture notes and other material as I go along.

Constructive criticism of the notes is welcome. (Long deranged rants about fractional reserve banking are not.)

65 replies on “Notes on Banking and Central Banks”

A lot of people who did degrees/MA in Economics in the 90s and who are either bored in their job at this stage or need to change career because their sector has taken a hit have been talking to me about how best to get back into Economics. I have a lot of vague ideas on this so I will restrict them to a short comment. This blog has been very useful to a lot of people who want to keep in touch with what academic economists are thinking without having to wade through journals but there is definitely a very strong appetite among Economics graduates to bone up on some of this material without having to take a career break. We have echo360, a recording package, in UCD Karl so we could hit the record button and hey presto it would be “Karl for the People”. The best example of this in the world is the MIT open course ware initiative which is mindblowing. The lecture course below by Michael Sandel of Harvard is another example. Stephen Kinsella in Limerick also tends to make his lectures available as audio or video. I have started recording mine but I still have a lot of questions in my mind about what would be the best way to make them available more broadly.

I think this is a great idea. Besides showing the open-minded and democratic spirit with which academic economists in general abound, it is a useful means of bridging the gap between academic economists and their sceptics, much of whose scepticism is – I suspect – rooted in the discomfort of not fully understanding all that shifting demand curve stuff they had to suffer through in their first year in college.

Wow, that was a long sentence.

Picking the best courses in Economics from the Irish system, producing them properly using professional broadcasters and making them available online here for free would be really really cool in my opinion Georg and it is certainly the case that all the best universities in the world are starting to do it. It would not stop students showing up. It would probably encourage more students to want to study Economics.


Thanks for that. The key slide is the one on financial intermediation. Our banking system confers two huge benefits on society: Maturity Transformation and Risk Transformation. As someone with a life assurance background this almost amounts to a reckless mismatch, but it is clearly of huge advantage, in fact essential, to our modern economy.

The Maturity Transformation mismatch risk (liquidity risk) is supported by society providing lender of last resort facilities through the central banks. The Risk Transformation mismatching risk was meant to be underpinned by capital reserves provided by investors but we have found that in reality even this risk has to ultimately be underpinned by society.


Here is the how to apply site on iTunesU:

The platform is there, already used by major Universities, while apple has a small market share, iTunes is Windows and OSX.

What I would consider is a somewhat interdepartmental approach within UCD to start with, get some economics lecturers and IT guys on board, outline the project and requirements and propose to Dr Brady.

UCD is not on iTunesU as far as I can see, not yet, but this could be a brilliant start… Just thinking out loud.

While we are on the subject on central bank’s Karl, the Examiner reports today that €237m in bonds was purchased by the ECB last week bringing the total to €61bn since May.

This is from the ECB latest figures:

“The holdings by the Eurosystem of securities held for monetary policy purposes (asset item 7.1) increased by EUR 237 million to EUR 122.4 billion as a result of settled purchases under the Securities Markets Programme. Therefore, in the week ending 10 September 2010 the value of the Securities Markets Programme portfolio and of the covered bond purchase programme portfolio amounted to EUR 61.2 billion and EUR 61.1 billion respectively.”

Have they interpreted that correctly or can some of that 237m actually be non-Government bonds?

Georg – we put all the Geary podcasts on ITunes (largely Colm Harmon’s initiative). The picture quality to date is reasonable but not great and this will improve a lot this year.

UCD is not on iTunesU yet. The Humanities people here have started to make a lot of one-off lectures available as a series of “scholarcasts”. These are also available on iTunes. Thinking in terms of the scale of Irish economics, something like below would itself be a great start.

Excellent initiative. My only regret is that you didn’t have these ready to go a year ago as it might have helped to reduce the heat and generate more light on many threads. It is also a tad ironic, but not, perhaps, surprising, that there is genuine and widespread interest only when things go seriously pear-shaped.

The price of liberty may be eternal vigilance, but it also requires knowledge and understanding. Many thanks again.

there would be a genuine and widespread interest in engineering if all the bridges in the country suddenly collapsed, or in aviation if it emerged that stewardesses had been landing the planes for the last ten years. appreciate you making this material available. thank you

Those interested in reading up on economics course material would probably be interested in the following

To complement the formal university material, I suggest that a “list of recommended reading” be published on the site.

It can be quite diverse in scope (historical, statistical etc) and have different categories from novice to professor. ( “How to Lie with Statistics”, “The Great Crash”, “Freakonomics”, “Future Files”, “The Quants” etc etc.)

@Karl Whelan

Economics, as a discipline, and a fallible human science, remains open.

Sound move.


Question for ye, excuse my ignorance but how exactly is the Financial Regulator going to put a final amount on the Anglo bill in October? I thought we wouldnt know until it eventually sold off all its ropey assets over the next 10 (or 50 more likely) years. Is this a case of the Financial Reg saying right €30 bill is the final amount…if Anglo needs anymore, the cash will have to come from somewhere else.


@ Ed

Very good question. I’ve been meaning to write a short post about this. Indeed, you’re exactly right. The FR can’t put a figure on it yet because we don’t know how much the various assets are going to yield over time. It will depend upon what happens in, like, the future.

I think the “final bill” thing is code for something a bit different. They have clearly been lowballing their estimate of the final cost. If a credible attempt is made at coming up with an estimate with useful details released to the public, then perhaps people will be confident to use that estimate.

But yes your basic point is correct.


I would definitely be one of the general public that you are aiming at with this. Always had an interest in economics but never studied it indepthly. Have read the first 2 lectures and already it provides some clarity to my understanding of the banks.

Well done and thank!

Excellent idea Mr. Whelan, thank you for making this available!
Now if David Farrell could see his way to doing the same……

I suppose this means there will be less toleration for wooolly arguments any more. I guess I’ll just have to make an effort. I was kind of skimming over anything too technical up to now. Anyway it might improve the quality while reducing the quantity of posts
thanks – I can’t wait to try it


‘… the open-minded and democratic spirit with which academic economists in general abound,…’

How many have you met or read? Don’t confuse the ‘particularly open’ of the ‘tiny few’ around here with the ‘rigid closed general mass’ of academic economists ……………

You really should listen to the interview this evening of Minister Carey by George Hook. A bit like this thread they veer hopelessly off-topic (Cowen’s PR skills) on to Anglo (inevitably). Hook makes exactly the same point as above, by Ed, that you replied to. The Minister’s reply is priceless: “Now George, neither you nor i know anything about this stuff, but there are lots of experts out there who do…and the financial regulator will be able to answer those 10 year valuation questions….as can the Chairman of Nama, Frank Daly, who gave great reassurance on exactly these matters to our meeting in Galwey. You should get him on your show”
I swear, I am not making this up.


Certainly true. They would be even more interested if they found out that engineers truly believed that bridges were magically held up by something called the “magic” of the engineering marketplace. They might be more than interested if they then found out the bridges were built with substandard concrete and that the sellers of the concrete were demanding to be paid because they were “secured bridge bondholders.” And, by the way, the “security” is the taxpayer’s pocketboook. The final straw is, the professional economists employed by the state (interesting concept, that, the state) are absolutely in agreement that the secured bondholders must be protected, at all costs.

Pat Carey cannot be expected to know anything of High Finance. I could ask what you know about his portfolio…probably nothing. He was guilty of honesty.

@the loan arranger:
As a member of the government (cabinet), Mr Carey shares in collective cabinet responsibility. Is it possible that he participates in making decisions on subjects about which he knows nothing? That must be difficult for him; maybe he should consider his position. Indeed perhaps he, and others in the same position, should resign.


@Kevin O’brien

Clicking on the link at reveals over a hundred or so extremely sophisticated economic papers. How is it possible with all this mathematics, theory, etc. etc. that no one could predict an $8 Trillion housing collapse? If these people worked for the weather service and still could not see a hurricane coming they would have been fired a long time ago. why should anyone take seriously ANY economic professional or academic?

I got a lot out of watching the Chris Martenson videos. Great visualisations around the basic principles of how banks work, all the way to thought provoking questions ranging from what happens when the oil runs out to can America perpetually print money.

I guess I’ll find out soon what this group’s opinion of Chris Martenson is 🙂

Well it is economics course material, which is what this thread is about.

I actually agree with what you are sort of getting at, hence the reading list idea.

Some corrective to the idea that inflation can always be caused by a central bank?

While CB does enable pollies to gift to voters, by inflation, there is an alliance of interest that can lead to short sightedness.
Savings by individuals are discouraged by central bank policies.

Instabilities caused by CB complacency.

I have, I swear!, resisted the temptation to rant. History of CB failures, if there ever were any(!).

Allan Harris
Many saw it coming Allan. But they chose not to alert everyone. Why should they? They can take an opportunity open to those who possess info the markets do not “know”.
Others are not competent.
Others did alert but were kept out of the msm because those who own msm did not want caution in the market for selfish reasons.
What papers have you come across to rectify the situation?
Minsky and von Mises are both great at challenging the orthodox views that the US Fed espouse.

If the course does not cover what has happened recently, you will cause the split that many in economics experience. Do as I teach to pass not what happens in the real world. You would not want that, but many economists might as it is less challenging.

Besides, fractional reserve banking is a great scam, I just wish I was on the inside!

@loan arranger
Sorry, but you couldn’t be more wrong. Minister Carey admitted he knew nothing about any aspect of finance, not ‘high’ finance. I presume, therefore, that you would expect him to recuse himself from all aspects of cabinet discussions that have a financial element. Of course you would. I cheerfully admit to knowing nothing about Mr Carey’s brief. On theface of it I think it qualifies as a McCarthy quango that could be abolished without anyone noticing. But, as i say, I know nothing about it. But are you Eoin in disguise, introducing yet another non sequitur? You may not know this, but I have never sought public office, unlike Minister Carey.
But he did cliam to know that both the Financial Regulator and the Chairman of Nama had the technical expertise to value properties today (explicitly in markets where no transactions are taking place) and to be able to forecast, with cacuracy, property prices in 10 years time. What bit of that do you think is honest?

Thank you Karl.

A wonderful proposal and I look forward to the read.

May I suggest you send a printed copy to:

Department of Finance,
Government Buildings,
Upper Mount Street,
Dublin 2.


The intro to your Slides and explanation of banking system is far better and just simply clearer than any of the “hold on… I’ll get my dictionary… find the most complex words and write a rant on Irisheconomy” bol*ox that gets posted here sometimes!

Good stuff!

@ Simpleton

“But are you Eoin in disguise, introducing yet another non sequitur?”

Whats that now? I dont know anything about Latin, so i will recuse myself from this discussion…




As a graduate in History and Politics who is trying to understand the current economic crisis I must say I am extremely grateful for access to this sort of course.
Many thanks!

Further to my earlier post I think it would be more honest if society, in the guise of the central banks, provided not only lending of last resort but also risk taker of last resort to the banking system. That has turned out to be the reality anyway.

People argue that “risk taker of last resort” creates moral hazard whilst they have no issue with “lender of last resort”.

Of course society needs protections in this paradigm. These would come in the following forms:

1. Liquidity reserves to ensure lender of last resort is indeed triggered only as a last resort.

2. Private investor capital reserves to ensure ditto for risk.

3. Strong regulation and oversight

We have been dogged for some time now by the debate as to whether bondholders are providing liquidity reserves or capital reserves. We should make it clear once and for all that it is the former. Subbies provide the latter of course.

Thanks Prof. Whelan, this is a great idea. I’m definitely one of those hazy understanding, general public types, now retired from my finance/accounting career with multinationals. I look forward to auditing your course and hopefully adding some substance to my limited knowledge (but substantial skepticism) in this area.

Regarding rants, my wife has long considered me semi-deranged, but I try to avoid ranting or pontificating, at least until i know what I’m talking about.

Thanks again

(p.s. to the Alchemist. an interesting bit on laryngitis. I tend to sneeze when i’ve had too much. Perhaps that’s one of the differences between an Irish-american and a true Irishman).


In addition there has to be more regulation of the shadow banking system which helped to almost bring the house down in 2008. Strict banking regulation is useless if the real danger migrates elsewhere where there are no rules.


One thing you can be sure of is that the inherently unstable, but insatiably greedy, beast that is financial capitalism will mutate to operate in the areas where there are least rules. It is a thankless, but never-ending, task for policy-makers and regulators to seek to fence it in and shackle it to produce outcomes that might be, in some way, economically and socially useful.


Yes, it may come as a surprise but ministers do participate in decision making in areas in which they are not expert. That is why they have advisers and officials. You do not have to be a polymath to sit in Cabinet or indeed hold any executive position.

Also, some Minister tend to confine themselves to areas in which they have an interest or expertise.

without googling, what brief does Minister Carey hold. You know nothing of it yet you claim it to be a Quango. I know nothing of his contribution at Cabinet, neither do you. I would assume he does not contribute much on issues of banking and finance. That is probably left to people with expertise in the area, like… er… Minister Lenihan and …er… Ryan and… um …An Taoiseach when the confluence of events is in his favour. Leave Pat Carey alone…he is harmless.

@the loan arranger:
“Yes, it may come as a surprise but ministers do participate in decision making in areas in which they are not expert.”

Well, actually, no, I can’t say that it does come as a surprise. In fact, I suspect that, for many years, we’ve had fifteen ministers, none of them expert in anything very much, apart from electoral arithmetic.

You mark my words, no good can come of it. One of these days there will be some awful problem, perhaps an economic one, and none of the bugg^H^H^H^H ministers will have a clue what to do about it.



we should immediately replace them with experts in their field who make informed but wrong decisions. The CB was populated by economists and experienced regualtors, yet what happened. We have hundreds of economists yet how many called the bubble. Your faith in experts is touching.

@the loan arranger
No, he is not harmless & whether you or I know anything about his brief is utterly besides the point. Try answering my questions rather than offering the ususal stream of non sequiturs. Would we miss his ministry?

He made specific and significant claims about banking & finance which were demonstrably false. He did not say to the interviewer ‘don’t ask me, ask one of my more qualified colleagues.’ Quite the reverse in fact.

If he & the cabinet of which he is a member acts on those claims then he is potentially very damaging. If those claims were made on the basis of poor advice then we have a right to point that out the error.

You do him no favours by portraying him as a bumbling old duffer.

@ Simpleton

“try answering my questions” Who made you the Sherriff? I doubt we would miss the Dept although the emplyees might
I was working at the time so I do did not hear the interview. I am only going on your reportage. Pat Carey is a harmless individual and to single him out for condemnation is tantamount to bullying. Lets have your critique of the main actors and stop concentrating on a minister who was not even a member of the cabinet on the night that the Guarantee was brought in. The only reason he was put on with that old Buffoon Hook was presumably because out Taoiseach does not do interviews in the afternoon.

@the loan arranger:
You constructed your own scenario; any faith therein is not attributable to me.


@ Karl,
Thanks a million. The notes are great, very clear. Fairly basic so far even for someone who has no training in economics but I look foward to the next one.

The fiction that banks are out of control, independent in any way, need reserves etc. all discussed in this most devaint article. Students AVOID unless you want a reality close to reality. No marks for this in economics exams though! Got to keep people bamboozled!

Banks are known to destroy economies. History has many examples and Thos Jefferson and others were well aware of it. The EU knew what was happening in Ireland. Perhaps the quid pro quo for pulling our nuts out of the fire will be higher CT rates?

well there’s a little rant coming, but first I agree with the overall sentiment that fractional reserve banking offers advantages so profound that it is almost impossible to imagine how a modern economy could be created without it because it really does allow the current generation to borrow from the future to fund such amazing things as cities, roads, electricity systems, telecoms infrastructure, indeed everything that requires a huge upfront investment and that lasts for 10+ years would be almost impossible to fund without fractional reserve banking.

But there is a dark side to, isn’t there? The system allows the creation of money from nothing. I am not an economist but I understand that banks can lend money that is really just an accounting entry in its books. Is that correct? because if it is, then a bank with 100 of currency in deposit can create 10000 in loans (10 to 1 leverage and assumes that the loans are deposited with the bank). So money is created from nothing, but interest costs are deducted from production profits. Is that correct too? because if it is, then at some point in a constantly growing loans system, the banks have to own the profits from all production, don’t they?

Second, neo classical economics assumes rational decisions by all actors, but fractional reserve banking requires that the actor can see the future (confidence). But at some point in a cycle, isn’t is possible that the average regulator/investor/economic actor is wrong? what happens then?

I have yet to see leverage treated satisfactorily by neo-classical economics.


Ooops! You seem to know too much! Turn yourself in for reeducation! The future bears the cost, but there is always Jubilee? Of course, that requires an Holocaust, the deaths of precisely 6 million as in the first world war and hey, guess what, second world war. Coming soon? As I said elsewhere, not likely as it further damages the balance between supply and demand as we have too many houses ……. Say, I know what brings up the birth rate: power failures! Nine months later, maternity hospitals spend on overtime! Nothing occupies people like the need to care for babies……

Ha ha…problem is that reeducation is very expensive where I live. Also, if I borrow to fund it, that debt would not be dischargeable in bankruptcy…..better maybe to hold onto to my bitter deviance and look for like minded souls on blogs…….


As an early noughties scholastic (sometime) attendee of R Thom, B Walsh et al at UCD – I am looking forward to reviewing your notes and webpage. Thanks.

PS I echo Keiths excellent idea below –

“Thank you Karl.

A wonderful proposal and I look forward to the read.

May I suggest you send a printed copy to:

Department of Finance,
Government Buildings,
Upper Mount Street,
Dublin 2.”


I am confused as to where, in theory, losses (if any) would be incurred by the Irish Central Bank and/or the ECB if Irish banks defaulted on their obligations to the Irish Central Bank and/or the ECB (leaving aside for a moment the issue of the blanket guarantee the the eligible liabilities guarantee scheeme).

I would have presumed that the Irish Central Bank’s capacity to “print money” is controlled by the ECB and ultimately the state/and the exchequer is liable to the ECB for any excesses in the printing of money? However, I think the system may be more complicated than that with the ECB itself being fettered by law and the national central banks.

I am further unclear about the assumed mechanics in the oft-expressed sentiment that there is no Keynesian free lunch and that future generations must bear the losses if QE/helicopter money is deployed now.

If you have time, perhap you would point me to a section in your notes on international money markets which deals with this. I have looked at the bit on central banks but I am still unclear.

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