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Bank A $0 deposit Bank B $1m deposit Total deposits: $1m Fred borrows $900k from Bank B and gives to Geraldine who puts it in Bank A Bank A $900k deposit wi
by iso1210 5y ago
Bank A $0 deposit
Bank B $1m deposit
Total deposits: $1m
Fred borrows $900k from Bank B and gives to Geraldine who puts it in Bank A
Bank A $900k deposit with no loan
Bank B $1m deposit with 900k loan (90%)
Total deposits $1.9m (90% above initial deposits)
Henry borrows 800k from Bank A and gives to Iris who puts it into Bank A
Bank A $1.7m with 800k loans (loans at 60%)
Bank B $1m deposit (loans at 90%)
Total deposits $2.7m (170% above initial deposits)
And the cycle continues, doesn't matter how many banks.
- deleted 5y ago[deleted]
- kgwgk 5y agoThere is no cycle for bank B there. It went from Bank B $1m deposit [$100k required reserves + $900k excess reserves] to Bank B $1m deposit with 900k loan (90%) [$100k required reserves + zero excess reserves] and it's still there at the end. It doesn't have excess reserves, it cannot make new loans if it cannot get more money. To be clear, my original comment was: "The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank. It will typically end in another bank." The bank =/= A bank One bank =/= The banking system [Of course when another bank gets more reserves it increases their capacity to extend new loans. The question was whether a bank with $1m in deposits can lend $9m, not whether the whole banking system could.]