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Leverage, banks hold the ability to lend a certain sum of money to multiple parties, thereby 'creating' more money. The amount of money lent vs the amount of p
by reallymental 9y ago
Leverage, banks hold the ability to lend a certain sum of money to multiple parties, thereby 'creating' more money.
The amount of money lent vs the amount of parties is the leverage ratio. It's usually managed well, but can get out of hand pretty quickly.
Edit: Forgot to mention reserve amounts. They are crucial.
- Retric 9y agoBanks don't create money. People treat IOU's after depositing money in banks as money, but they are IOU's not money. The difference may seem meaningless most of the time, but occasionally it becomes extremely important.