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"recides" -> resides. Sorry.

Btw, I'm an accountant.

@ Antti

That's all very true but actually helps to prove my point. The dispersion of risk over the capital structure of banks and, ultimately on to the taxpayer, as opposed to an otherwise individual risk in a bilateral credit agreement, are a) that which lend bank liabilities their property as accepted means of payment an b) why banks must be modelled seperately from other firms or individuals. They are not just benevolent, neutral score keepers that can be abstracted away! Risk dispersion is in this case a feature, not a bug. Although, of course any feature can turn in to a bug in an uncertain environment.

If the bank is a legal entity in and of itself, it is the bank that suffers the loss. It suffers the loss in terms of less income than otherwise according to its income statement. The bank, as a legal entity, and who takes the loss, does not reside on any side of its balance sheet.

The bank's shareholders may or may not be remunerated less by way of dividends because of the loss, but that is not a given.

"The buyer's account balance before the transaction could have easily been zero. No asset. After the transaction, the balance is minus $1,000. No asset."

Assume the entities bank at the same bank.

Before the transaction, balance zero.

Decides to do transaction.

The buyer decides borrows demand deposits from the bank.

There is an asset swap. The bank gets the buyer's bond(s). The buyer gets the bank's demand deposits (a certain type of bond).

The buyer then gets the goods/parcels, and the seller gets the demand deposits (another asset swap).

The buyer's account shows a negative checking account balance which is the positive bond balance.

The buyer later earns demand deposits in the future (another asset swap), which is in the checking account.

The buyer automatically buys back the bonds from the bank (another asset swap).

The demand deposits go back to the bank and the bonds go back to the buyer.

That makes the checking account balance zero.

It is all based on positive green "money" and positive green bonds denominated in positive green “money”.

The positive green “money” liability stays the same (I've assumed same bank for entities) and the positive green bond liability stays the same.

Whose asset it is moves around just like the bonds.

Sorry, guys. I didn't know there was page 2 on comments :-)

Too Much Fed: Just like Nick (who must think in terms of imaginary green and red money), you just can't let go of that world where "demand deposits" are created when a bank extends a "loan". It just isn't true in the case of an overdraft. I call that "money illusion".

Oliver: I believe we are more or less in agreement on that. I'd just like to point out that those are not bank liabilities (or should not be viewed as such, if we want to understand how they're connected to the real economy). "Bankrun" is of course partly correct in pointing out the legal side, and bank as a legal entity. But whereas a non-bank firm can be said to owe "credit entries on bank acocunts" to its creditors, a bank (especially not a central bank, and not the banking system as a whole) doesn't owe it's "depositors" credit entries, other than in the ledgers of other banks (but this is not why one usually holds credit balances in a bank's ledger).

Bankrun: Bank shareholders suffer through smaller profit every time there is a credit loss, right? The income statement is what we should be looking at. Dividends are another matter, not directly connected to this.

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