4 ms·
It's more accurate to say they loan out a multiple of deposits based on the inverse of the fraction (the "money multiplier"). If someone puts 1 million in the b
by JamesianP 4y ago
It's more accurate to say they loan out a multiple of deposits based on the inverse of the fraction (the "money multiplier"). If someone puts 1 million in the bank and the fractional reserve is 20 percent, they can now create loans of up to 4 million. Such that the reserve is 20 percent of their total assets of 5 million (= 4 million loans + 1 million cash).
- qnt 4y agoAgain no, neither of these are accurate. Modern banks do not operate on a fractional reserve basis at all. This is a falsehood peddled by well out of date undergrad econ textbooks https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy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...
- JamesianP 4y agoI'm describing what fractional reserve means. Technically that fraction has been set to zero very recently so it is trivial though still not false. This was discussed a lot elsewhere on this board.
- lupire 4y agoIf that you say is true then banks could lend infinite money to their friends and never collect it.
- imtringued 4y agoWell, except the friend part the money supply has never shrunk so far.
- lupire 4y agoNo, fractional reserve means that they can lend out $800K of the $1M deposited, even though the $1M is still counted as the depositor's money and also $800K is a available to lend. https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking
- dools 4y agoCan you describe the mechanism by which deposits held by a bank are lent to borrowers under the fractional reserve system described in that Wikipedia article?
- lupire 4y ago"Fractional-reserve banking is the system of banking operating in almost all countries worldwide,[1][2] under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers"
- dools 4y agoYes now it says: “to lend the remainder to borrowers” Can you describe how money that a bank has in deposits is lent out to borrowers?
- imtringued 4y agoOk you then make an agreement with another bank and that constraint is literally irrelevant.
- JamesianP 4y agoBut there's no multiplier as you describe it. It appears though. First deposit $1M. Then create that loan for 800k, and deposit it right back in the same bank. Now the bank has $1M versus 800k loans so the reserve is back above the 20 percent reserve requirement. We don't even need to work out the math, just keep repeating the process with smaller loans until we reach our limit at the reserve, which clearly must be (the very same) $1M in deposits, and the max of $4M loans, making for $5M total. Accounting rules to prevent this being done by a single bank alone just means it takes more banks trading loans to get the same effect. Rather than a wonky description of the rules, basic econ class still has the variations covered.