3 ms·
Not exactly. Banks "create" money when they make loans, but are only required to keep a certain percentage of that loan in reserve. http://www.cnbc.com/id/100
by cbanek 10y ago
Not exactly. Banks "create" money when they make loans, but are only required to keep a certain percentage of that loan in reserve.
http://www.cnbc.com/id/100497710 http://www.cnbc.com/id/100497710
You've hit the nail on the head with interest rates going up. More than that, many companies have been taking out debt to buy back shares of their company on the public market at recent prices. If the value of those purchased shares go down, that could also be trouble.
- tuna-piano 10y agoEven with reserve banking though, banks do increase the money supply but a banks assets are still always equal to its liabilities. Someone still needs to loan the money to these more indebted companies. Who is doing the additional lending?
- ww520 10y agoSimplified scenario. Bank's liability is the deposit people put in the bank. Bank's asset is its deposited cash. When people deposit money, the bank's liability and asset increase by the same amount. When the bank lends out a loan of X amount as cash, its asset is deducted with X cash, but it would book the loan as asset as well since the borrower owes the bank X cash. Everything balances out. When the bank lends out a loan of Y amount as fund in the borrower's account in the bank, the bank's liability increases by Y since Y has been deposited into the customer's account. At the same time, the bank's asset increases by Y since the bank receives the borrowed money under the customer name into its cash pile. Everything balances out. Afterward when the customer withdraws the borrowed money out of his deposit account, it decreases the liability and asset of the bank at the same time.
- AlexCoventry 10y agoThe Fed.