The statement of financial position

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1.
The statement of financial position (balance sheet) is a table in which asset assets are recorded on the left side and liabilities liabilities + capital equity corresponding to those assets are recorded on the right side. Since the liabilities and capital on the right side are recorded separately, the right side is recorded by dividing it into two compartments.

2.
A bank's statement of financial position differs from that of a typical business or household. Banks have special abilities, such as deposits they receive from customers, loans they give out, and checking accounts opened in the central bank. Deposits received from customers are obligated to be returned to customers one day. When there is an obligation to give something, it is recorded in the debt category on the statement of financial position. Therefore, the customer's deposit is regarded as a debt. At this time, the left and right sides of the statement of financial position must always be the same, so if the customer's deposit is recorded in the debt category on the right side, the corresponding cash will be recorded in the asset category on the left side.

3.
On the other hand, when a bank makes a loan, it records the increase in assets on the left because it receives long-term interest from customers. So, on the right-hand side, which of the liabilities plus capital? It's recorded as debt. Because the moment you make a loan, the amount of cash you give to the bank's account increases. As I mentioned earlier, the customer's deposit becomes a debt that the bank has to return someday. So the moment you make a loan, the loan is recorded in the bank's assets, and at the same time, the bank's debt is recorded with the cash that is increased in the customer's account. You'll be satisfied with the accounting term "asset = liabilities + capital." In this way, as the bank borrows assets and liabilities, the cash that wasn't there is salty and stretched, which is the bank's credit creation function. (*I've said this several times, I think the reserve ratio theory, which describes the credit creation process as the currency multiplier that occurred in the process of the loan-to-deposit cycle of reserves, is wrong. I only know the reserve ratio theory, so I hope those who criticized Jin Woo Son for explaining the bank's credit creation process will apologize.)

The capital items of a bank are very small, because as you can see above, most transactions that a bank does are recorded responding with "asset = liabilities."

4.
Meanwhile, a central bank is a bank of banks. A central bank's checking account can only be opened by a small number of authorized financial institutions. Once you understand this, you can understand what a central banking system is, and you can properly understand what it means to issue money. Commercial banks determine the appropriate level of new/extended loans in the lending market according to the needs of the private sector and according to the banks' own greed and risk management standards. And in order to raise the payment reserves set up to prevent a bank run, you receive the necessary funds through the checking accounts set up in the central bank.

5.
At this point, the central bank acts as a commercial bank, and the commercial bank acts as a customer to borrow money. Therefore, from the central bank's financial statement, the act of commercial banks raising funds from the central bank is the same as giving out loans from the central bank. Therefore, the amount borrowed by commercial banks is recorded in the assets of the central bank, and the amount of cash paid to the commercial bank's checking account is recorded in the debt category. The amount of money increases like this.

6.
Now, let me explain Masaki Shirakawa's article. According to the previous policy, most of the debt items in the Bank of Japan's statement of financial position were bank notes without interest. Cash issued by central banks is not interested. That's why traditional central bank debt items were mostly banknotes. However, the newly introduced non-traditional monetary policy began to control the volume of money by paying interest on interest (IOER) on the amount exceeding the legal standard from the reserves held by commercial banks in the central bank's checking account.

7.
Originally, the central bank was structured to guarantee profits in the statement of financial position. The central bank receives interest from funds given to commercial banks in the asset category or from government bonds it directly owns. On the other hand, the central bank's debt category is a bank note recorded in a regular bank's checking account, so it did not pay interest. So we had no choice but to be guaranteed income. This is the substance of Signiorage. Signiorage also occurs because interest is high because the time horizon of government bonds or loans held in asset items is long, and what is recorded in debt items is short in maturity and therefore low interest.

8.
Even if interest payments (IOERs) on excess reserves are made through the implementation of non-traditional monetary policies, they are only a fraction of the total debt items. So, the interest payments were not burdensome to the central bank. However, the types and quantities of assets that the central bank directly purchases have increased significantly since the financial crisis. As the number of asset items in the central bank's statement of financial position has increased significantly, so has the number of debt items. This is called quantitative easing.

9.
During the quantitative easing period, the central bank bought a huge amount in the bond market. Therefore, the price of bonds increased, and the corresponding bond yields decreased. The pressure to buy bonds decreases when quantitative easing ends. Therefore, the price of bonds will be lowered, and the corresponding bond yields will increase. In this case, if the central bank sells government bonds held, a loss will be realized and recorded as much as the difference between the cheaply sold price in the market and the book price of bonds recorded when it is expensive in the statement of financial position.

10.
However, if you do not sell the bond and continue to hold it until maturity, it is not recorded as a loss because it is returned to cash plus interest at maturity. If the proportion of excess reserves increases with this adoption of holding until maturity, the interest rate, which is the interest income from the central bank's assets and the interest expenditure paid from the debt, is the interest rate