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Banks definitely lend out more than they have in deposits. [1] It's why you've heard the term 'reserve ratios' etc.. [1] https://www.investopedia.com/articles

Banks definitely lend out more than they have in deposits. [1] It's why you've heard the term 'reserve ratios' etc.. [1] https://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp https://www.investopedia.com/articles/investing/022416/why-b...

kgwgk 9y ago
The link you sent doesn't say that they lend out more than they have in deposits (it says loans create deposits... so they will always have more deposits than there are loans). And the following passage doesn't make much sense: "When a bank makes a loan, there are two corresponding entries that are made on its balance sheet, one on the assets side and one on the liabilities side." If you take a loan to buy a house, it will not be a new deposit at your bank. It will be a new deposit at the seller's bank. And against that new deposit, that bank can extend new loans. Etc. http://thenextturn.com/wp-content/uploads/2015/04/Fractional-Reserve-Banking.jpg http://thenextturn.com/wp-content/uploads/2015/04/Fractional... Of course when you are just getting the loan it will appear as a deposit at your bank. But this is not to balance the loan. The loan is coming from a reduction in reserves. This temporary deposit (on the liabilities side) will increase the reserves temporarily (on the assets side), but only until you take the money out to do whatever you asked the money for. Definitely banks do not lend out more than they have in deposits (ignoring other forms of financing for banks, of course).
- alexasmyths 9y ago
  I see what you are saying, I agree, we are just arguing over words. Technically, you are correct - they don't lend out more than what is deposited, but what is deposited is 'created' (or at least deposited and lent money against those deposits are both considered 'in circulation') by they or other banks, ergo, banks end up lending out considerably more money than is created from the central bank.
  - kgwgk 9y ago
    We agree, then. Simplifying a bit, M0 (physical cash) is lower than M1 (M0 + checking accounts) and M2 (M1 + savings accounts) which are the usual measures for money in circulation. Note that there are also broader definitions of money, including as well long-term deposits and other money-like instruments.

kgwgk 9y ago

The link you sent doesn't say that they lend out more than they have in deposits (it says loans create deposits... so they will always have more deposits than there are loans). And the following passage doesn't make much sense: "When a bank makes a loan, there are two corresponding entries that are made on its balance sheet, one on the assets side and one on the liabilities side." If you take a loan to buy a house, it will not be a new deposit at your bank. It will be a new deposit at the seller's bank. And against that new deposit, that bank can extend new loans. Etc. http://thenextturn.com/wp-content/uploads/2015/04/Fractional-Reserve-Banking.jpg http://thenextturn.com/wp-content/uploads/2015/04/Fractional... Of course when you are just getting the loan it will appear as a deposit at your bank. But this is not to balance the loan. The loan is coming from a reduction in reserves. This temporary deposit (on the liabilities side) will increase the reserves temporarily (on the assets side), but only until you take the money out to do whatever you asked the money for. Definitely banks do not lend out more than they have in deposits (ignoring other forms of financing for banks, of course).

alexasmyths 9y ago
I see what you are saying, I agree, we are just arguing over words. Technically, you are correct - they don't lend out more than what is deposited, but what is deposited is 'created' (or at least deposited and lent money against those deposits are both considered 'in circulation') by they or other banks, ergo, banks end up lending out considerably more money than is created from the central bank.
- kgwgk 9y ago
  We agree, then. Simplifying a bit, M0 (physical cash) is lower than M1 (M0 + checking accounts) and M2 (M1 + savings accounts) which are the usual measures for money in circulation. Note that there are also broader definitions of money, including as well long-term deposits and other money-like instruments.