4 ms·
That's a common misconception. In reality, banks don't need deposits in order to loan money. As long as they loan at an interest rate above that of the central
by smaddox 11y ago
That's a common misconception. In reality, banks don't need deposits in order to loan money. As long as they loan at an interest rate above that of the central bank (and they always do), they can borrow reserves from the central bank.
That being said, banks can currently offload loans as securities, which might be what you're referring to. This is a major problem, though, because it incentivizes banks to make bad loans, and then to try to hide the fact that they are bad loans.
- mathattack 11y agoThere are trade-offs. Banks that hold all their loans to maturity get a benefit in knowledge of their borrower's true credit, but they lose the ability to hedge the idiosyncratic risk of their borrower base. (Example: A local bank in North Dakota that is holding all the recent mortgage loans to maturity may be struggling now)