Money and Banking Regulation: 9.5 Counterparts to Money

As well as analysing money supply, the monetary authorities also pay a great deal of attention to the counterparts to money, the main counterpart being lending by the monetary financial institutions to the private sector.

Such analysis may often be as helpful as looking at deposit growth in trying for understanding the important driving forces in the economy.

This is especially true if monetary financial institutions manage the liabilities side of their balance sheets (i.e. bid for deposits) to provide funds for on-lending.

The relationship between M4 and its counterparts is explained below.

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M4 and its counterparts

M4 deposits are the sum of the deposit liabilities of monetary financial institutions.

A consolidated balance sheet for MFIs is produced below.

In a similar way to the breakdown in deposits, lending to the private sector is subdivided into lending to each of the broader sectors. Indeed, the subdivision is slightly more detailed with lending to individuals, to unincorporated businesses, non-financial private corporations and other financial corporations.

Lending to individuals is further subdivided to give lending secured on dwellings (essentially but not entirely to purchase houses), lending through credit cards and other lending to consumers.

Taken together with the deposit figures, analysts are able to ascertain the financial health of these broad sectors of the economy.

In addition, the data provide a valuable insight into, for example, the strength or otherwise of the housing market (via the rate of growth in secured borrowing) and of consumer spending (via the rate of growth in consumer credit).