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So in theory we could have 30-year fixes, from new money, because the balances are unrelated, and a bank's ability to pay its deposits is more about their other services.
I think this is where it's important to distinguish between the system as a whole and any individual bank. At the system-level, yes, duration mismatch does not exist because loans and deposits are always in balance (as they mutually create and destroy each other). However, any individual bank is still at risk of bank runs if all of the depositors decide to move their money to another bank.
NickCJ-
Thanks, and I did read that a few years back, will re-read.
I guess, looking from a perspective of wanting higher housing security and less mortgage volatility in the UK, additional insurance and protection of deposits or other ways of reducing the possibility of bank runs could then assist a move toward longer term fixed mortgages.
Anyway, I’ll stop derailing the thread now. Thanks for your responses.
slippers
Thanks, that's the bit I was missing — makes a lot of sense.
My money multiplier comment was more aimed at this. As I understand it — and this is a bit basic, I'll admit — is that if you throw out the Diamond-Dybvig model, there's no actual connection between their long term assets/mortgages and their short term liabilities/giving out deposits. So in theory we could have 30-year fixes, from new money, because the balances are unrelated, and a bank's ability to pay its deposits is more about their other services.
Or is that too simplistic?