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That's the whole basis of fractional-reserve banking, banks loan out deposits while keeping a small percentage on hand (last I cared to check it was 10%) to mee
by UncleEntity 8y ago
That's the whole basis of fractional-reserve banking, banks loan out deposits while keeping a small percentage on hand (last I cared to check it was 10%) to meet their reserve requirements.
Without deposits banks couldn't loan out anything since they couldn't meet their reserve requirements and they'd basically be insolvent.
So, true, banks don't loan out 100% of deposits but they certainly do loan out deposits.
- didgeoridoo 8y agoEdit: my comment was misleading and confusing and I’m too tired to fix it right now so into the bin it goes :)
- klodolph 8y agoNo, that's not correct at all. It does mean that the back loans out an amount of money equal to 90% of its deposits. In some sense it's not the "same" money because the deposit amount is counted as money in its own right... both the amount of money in the loan and the amount of money in the deposit is counted as "money supply". The 1000% figure comes from the fact that the money that the bank loans out is in turn held in another deposit account somewhere, and so it has a cascading effect... I deposit $100, my bank loans out $90 to person B, that money gets saved in a bank which can then loan out $81, then $72.9 gets created somewhere else. 1000% is just the limit of the sum 1 + 0.9 + 0.81 + ...
- Dylan16807 8y agoAnd to put that all together, it means the bank is responsible for $1000 in deposits, has $900 owed to it in loans, and has $100 of cash in the vault.
- Dylan16807 8y ago> Edit: replace “deposits” with “reserves”, which is all that matters. Sure. So we have a 10% reserve requirement. Logically that means we have 90% loans, and 90% is nine times as much as 10%. So loans are 900% as big as reserves. Is that supposed to be surprising?