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The way banks create money is as follows: you lend a bank X, the bank then lends 9x X and calls the X you gave them "reserves". The reserves don't get lent. I
by cryptonector 8y ago
The way banks create money is as follows: you lend a bank X, the bank then lends 9x X and calls the X you gave them "reserves". The reserves don't get lent. If you want to know where the 9x X comes from, the answer is: thin air.
Banks count on (depend on!) there not being a run on the banks, and they count on borrowers to not default at a higher-than-expected rate. As long that is the case, the banks thrive, the borrowers thrive, and the savers thrive. If however, the economy tanks hard enough, then too many borrowers go broke, savers get scared and ask for their money back, and the banks go bust.
- stephen_g 8y agoThat’s called the ‘money multiplier model’, and it’s a popular but incorrect model. Banks lever capital (paid up shares and retained profits) to create money for loans, not deposits. Existing deposits are funding for interbank settlements (for transfers). The amount of reserves the bank has doesn’t actually affect lending one bit - it does affect liquidity but most countries don’t even have reserve requirements because banks can just borrow reserves from other banks or the lender of last resort (central bank) if they need to. The main bank regulation now is capital adequacy ratios.