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Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal. Thi

Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Meaning, rather than let the cash sit in a vault, the bank is allowed to loan that money out to other people. If everyone wanted their money back, the bank would not be able to fulfill the request until they have recalled all those loans or perhaps sold the loans to other banks.

tacostakohashi 10y ago
In general, loans are not able to be "recalled".
branchless 10y ago
Nope. You could have a full reserve banking system and lend out all deposits. BoE has some news for you: https://bankunderground.co.uk/2015/06/30/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters/ https://bankunderground.co.uk/2015/06/30/banks-are-not-inter...
- eru 10y ago
  In a similar vein: the generally awesome Matt Levine has an article about how a bank with perfectly matched assets and liabilities would look like. http://www.bloomberg.com/view/articles/2014-08-27/lending-club-can-be-a-better-bank-than-the-banks http://www.bloomberg.com/view/articles/2014-08-27/lending-cl...
  - roymurdock 10y ago
    Here's the 30 second summary: Lending club is an entity that bears no risk because it simply matches capitalized lenders with borrowers in the present. It matches supply and demand right now. A bank is an entity that bears risk because it matches borrowers with lenders in the future - meaning that the borrower might simply be lending to his or her future self. The bank is willing to spread that risk among all of its shareholders, and is usually backed up by a government agency to provide that service.
    - abcampbell 10y ago
      Maybe in theory. But in practice they have 1) operational risk - insofar as they are the middle-man and so are exposed to investors suing them when the loans go south 2) Implicit credit risk - in that if their loans blow up the losses suffered by their levered investors will likely prevent them from coming back to the market place to 'roll the loans' 3) Explicit credit risk - in that they have invested capital in a subsidiary HF (Cirrix) which buys their loans and is on the hook for the losses (which could flow up to the parent) http://www.inc.com/business-insider/inside-lending-club-scandal.html http://www.inc.com/business-insider/inside-lending-club-scan... https://personalmoneyservice.com/lending-club-fraud/ https://personalmoneyservice.com/lending-club-fraud/ Key passage: "As a result, the company may need to use its own funds to purchase these loans in the coming months." In other words, LendingClub is going to fundamentally shift its business model from taking no risk to taking on the risk of borrowers defaulting. The startup sold itself as simply a marketplace, connecting borrowers with investors, but now it is buying its own product. The equivalent would be Airbnb buying up loads of houses to list on its own platform, to keep it growing."

tacostakohashi 10y ago

In general, loans are not able to be "recalled".

branchless 10y ago

Nope. You could have a full reserve banking system and lend out all deposits. BoE has some news for you: https://bankunderground.co.uk/2015/06/30/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters/ https://bankunderground.co.uk/2015/06/30/banks-are-not-inter...

eru 10y ago
In a similar vein: the generally awesome Matt Levine has an article about how a bank with perfectly matched assets and liabilities would look like. http://www.bloomberg.com/view/articles/2014-08-27/lending-club-can-be-a-better-bank-than-the-banks http://www.bloomberg.com/view/articles/2014-08-27/lending-cl...
- roymurdock 10y ago
  Here's the 30 second summary: Lending club is an entity that bears no risk because it simply matches capitalized lenders with borrowers in the present. It matches supply and demand right now. A bank is an entity that bears risk because it matches borrowers with lenders in the future - meaning that the borrower might simply be lending to his or her future self. The bank is willing to spread that risk among all of its shareholders, and is usually backed up by a government agency to provide that service.
  - abcampbell 10y ago
    Maybe in theory. But in practice they have 1) operational risk - insofar as they are the middle-man and so are exposed to investors suing them when the loans go south 2) Implicit credit risk - in that if their loans blow up the losses suffered by their levered investors will likely prevent them from coming back to the market place to 'roll the loans' 3) Explicit credit risk - in that they have invested capital in a subsidiary HF (Cirrix) which buys their loans and is on the hook for the losses (which could flow up to the parent) http://www.inc.com/business-insider/inside-lending-club-scandal.html http://www.inc.com/business-insider/inside-lending-club-scan... https://personalmoneyservice.com/lending-club-fraud/ https://personalmoneyservice.com/lending-club-fraud/ Key passage: "As a result, the company may need to use its own funds to purchase these loans in the coming months." In other words, LendingClub is going to fundamentally shift its business model from taking no risk to taking on the risk of borrowers defaulting. The startup sold itself as simply a marketplace, connecting borrowers with investors, but now it is buying its own product. The equivalent would be Airbnb buying up loads of houses to list on its own platform, to keep it growing."