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Yes, there are of course limits to bank lending. Ultimately, the limiting factor is the ability of banks to make profitable loans. The capital and the reserves
by rags2riches 7y ago
Yes, there are of course limits to bank lending. Ultimately, the limiting factor is the ability of banks to make profitable loans. The capital and the reserves will follow if the profitable loans are there.
The money lent does not go away when the check or whatever is cashed at another bank. The reserves follows the check. We're just working with more balance sheets now.
As long as the loan asset remains in the books, it earns interest which will add to bank equity.
We can keep bringing up details, but the basics remain the same. Bank lending creates money.
- kgwgk 7y agoWe agree, money (under various definitions) is created within limits. In fact banks also create money when they take cash deposits (and destroy money when they hand out cash). If I deposit a $100 bill into a bank we’re increasing the money supply because I have $100 and so does the bank (until it spends it, trades it for a non-money asset or lends it out).