Actually, that it's not how it works in practice. The credit department of a bank, doesn't check if the bank have enough reserves before lending. They only che

Actually, that it's not how it works in practice. The credit department of a bank, doesn't check if the bank have enough reserves before lending. They only check if the new lending make senses from a business perspective. If it does, it concede the credit to the customer. The bank is legally obliged to have the reserves, so, a posteriori (and not before) the bank will try to get the reserves in the inter-bank market (from other banks). If there are not enough reserves in the system the price of the reserves will go up. That's the interest rate. Central banks don't target the quantity of reserves, they only care about the interest rate. So, if they want to keep the interest rate in their target, they have to create new reserves. So, it's the lending what create reserves, not the other way around. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... http://bilbo.economicoutlook.net/blog/?p=6617 http://bilbo.economicoutlook.net/blog/?p=6617 http://bilbo.economicoutlook.net/blog/?p=14620 http://bilbo.economicoutlook.net/blog/?p=14620