3 ms·

It has a lot to do with it. If you deposit X to the bank, and the reserve requirement is R (say R=0.1), then the bank can loan out X(1-R) to someone else, who

It has a lot to do with it. If you deposit X to the bank, and the reserve requirement is R (say R=0.1), then the bank can loan out X(1-R) to someone else, who can deposit that money. Then on the basis of that deposit, they can loan out X(1-R)(1-R), and so on. The geometric series says that a deposit of X becomes bank-created money in circulation of up to X/R. With a reserve of 10%, $100,000 can become $1,000,000. That legal fractional reserve requirement acts like a powerful lever on how much money banks can create.

irln 10y ago
> That legal fractional reserve requirement acts like a powerful lever on how much money banks can create. With respect that is not accurate. [1][2] [1] http://www.cnbc.com/id/100880857 http://www.cnbc.com/id/100880857 [2] http://www.cnbc.com/id/100497710 http://www.cnbc.com/id/100497710
- sevenless 10y ago
  I don't see how those links back up that assertion. The second one gives a more detailed explanation of the mechanism I outlined. If you're saying the market always checks excessive leverage by pricing risk fairly, we saw how well that worked in 2008! This might interest you. It shows the impact of recent increases in capital reserve requirements on corporate lending. https://www.financedigest.com/post-crash-banking-regulation-is-transforming-the-world-of-corporate-lending-for-the-better.html https://www.financedigest.com/post-crash-banking-regulation-... > The ongoing impact of post-crash banking regulation on corporate lending is a case in point. Thanks to reforms such as Basel III, banks must now hold a far greater portion of their capital in reserve.Some banks may face even stricter requirements in future; only this month Sir John Vickers called for UK banks to be forced to shore up their financial buffers further in the face of renewed market volatility. > These measures are primarily motivated by a desire to make the overall system more stable, to ensure adequate reserves and liquidity in the case of another major shock. But part and parcel of this is the fact that it is now far harder and less profitable for banks to lend to a range of businesses. > As a result, banks have been steadily withdrawing from large areas of corporate lending as they look to reorient their focus to key relationships and diversifying risk. This has left a gap in the market: many corporates are finding it near impossible to get the level of financing from banks that they previously relied upon.
  - irln 10y ago
    Here are some references to my main assertion that reserve requirements don't limit a bank's ability to loan, instead capital requirements are the limiting factor. Another good source from digi_owl: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf http://www.bankofengland.co.uk/publications/Documents/quarte... Also this: https://www.newyorkfed.org/medialibrary/media/research/epr/02v08n1/0205bennpdf.pdf https://www.newyorkfed.org/medialibrary/media/research/epr/0... and this: http://www.economonitor.com/lrwray/2013/08/15/banks-dont-lend-reserves-who-knew-mmt-thats-who/ http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len... and finally this: http://www.forbes.com/sites/francescoppola/2014/01/21/banks-dont-lend-out-reserves/#346bc5123594 http://www.forbes.com/sites/francescoppola/2014/01/21/banks-...

irln 10y ago

> That legal fractional reserve requirement acts like a powerful lever on how much money banks can create. With respect that is not accurate. [1][2] [1] http://www.cnbc.com/id/100880857 http://www.cnbc.com/id/100880857 [2] http://www.cnbc.com/id/100497710 http://www.cnbc.com/id/100497710

sevenless 10y ago
I don't see how those links back up that assertion. The second one gives a more detailed explanation of the mechanism I outlined. If you're saying the market always checks excessive leverage by pricing risk fairly, we saw how well that worked in 2008! This might interest you. It shows the impact of recent increases in capital reserve requirements on corporate lending. https://www.financedigest.com/post-crash-banking-regulation-is-transforming-the-world-of-corporate-lending-for-the-better.html https://www.financedigest.com/post-crash-banking-regulation-... > The ongoing impact of post-crash banking regulation on corporate lending is a case in point. Thanks to reforms such as Basel III, banks must now hold a far greater portion of their capital in reserve.Some banks may face even stricter requirements in future; only this month Sir John Vickers called for UK banks to be forced to shore up their financial buffers further in the face of renewed market volatility. > These measures are primarily motivated by a desire to make the overall system more stable, to ensure adequate reserves and liquidity in the case of another major shock. But part and parcel of this is the fact that it is now far harder and less profitable for banks to lend to a range of businesses. > As a result, banks have been steadily withdrawing from large areas of corporate lending as they look to reorient their focus to key relationships and diversifying risk. This has left a gap in the market: many corporates are finding it near impossible to get the level of financing from banks that they previously relied upon.
- irln 10y ago
  Here are some references to my main assertion that reserve requirements don't limit a bank's ability to loan, instead capital requirements are the limiting factor. Another good source from digi_owl: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf http://www.bankofengland.co.uk/publications/Documents/quarte... Also this: https://www.newyorkfed.org/medialibrary/media/research/epr/02v08n1/0205bennpdf.pdf https://www.newyorkfed.org/medialibrary/media/research/epr/0... and this: http://www.economonitor.com/lrwray/2013/08/15/banks-dont-lend-reserves-who-knew-mmt-thats-who/ http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len... and finally this: http://www.forbes.com/sites/francescoppola/2014/01/21/banks-dont-lend-out-reserves/#346bc5123594 http://www.forbes.com/sites/francescoppola/2014/01/21/banks-...