16 ms·
The multiplicative effect of fractional reserve doesn't work like that. Assuming a 10% reserve: You give your bank 1 EUR, they can loan out 0.9 EUR. The person
by reitzensteinm 8y ago
The multiplicative effect of fractional reserve doesn't work like that. Assuming a 10% reserve:
You give your bank 1 EUR, they can loan out 0.9 EUR. The person receiving the loan spends the 0.9 EUR, which is then placed in the merchant's bank account, and this bank can then loan out 0.81 EUR, etc.
A total of 1/0.1 = 10 EUR is the theoretical maximum amount of deposits created by the existence of the original 1 EUR (with 9 EUR in matching liabilities).
But your bank doesn't get to lend all of that out and collect interest on it, and they actually can benefit less from lending your money than you could, e.g. on a P2P lending site, where you'd be free to not keep a reserve.
That's not to say that the spread between the interest rate the bank pays you and the interest rate they charge for loans isn't extremely large (an order of magnitude in many cases), and overall a great business to be in.
- nkkollaw 8y agoI mean, thanks for the more detailed explanation, but it doesn't make it sound any less unethical (to not say "criminal" in a colloquial way).
- reitzensteinm 8y agoDo you believe loaning money in the first place to be unethical? Or just banks loaning out money that has been deposited with them.
- nkkollaw 8y agoI believe charging premium to lend what you don't have to be unethical. Think about loans that ruin people's lives (student loans, for instance), and compound interest on those loans that make them basically unpayable: the fact that they didn't even have that money to lend out in the first place is what I think is unethical.