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Any bank could loan out an infinite amount of money. If you come to a bank and ask for a loan (and they approve), the bank will create the loan (an asset on the

by jljljl 4y ago

Any bank could loan out an infinite amount of money. If you come to a bank and ask for a loan (and they approve), the bank will create the loan (an asset on their balance sheet) and a matching deposit (a liability on their balance sheet). They could do this an unlimited number of times, as long as the deposits they create are recognized and accepted by the economy. Generally banks will have some reserves (currency, accounts they can draw on, etc) to pay out people when they withdraw from their deposits, at their discretion The problem comes if people try to withdraw or move their deposits, and the bank does not have reserves to cover the withdrawal. In these cases, the bank would need to sell some of it's assets -or- borrow money from somewhere else. If they can't liquidate assets fast enough, they have a liquidity crunch and will need to borrow or sell the company. If the value of the assets is below the amount being withdrawn, they're insolvent. The Fed can act as a lender of last resort in liquidity times, but if a bank is insolvent they likely won't be able to post collateral to get loans from the Fed.

whatshisface 4y ago
>the bank will create the loan (an asset on their balance sheet) and a matching deposit (a liability on their balance sheet). They could do this an unlimited number of times, as long as the deposits they create are recognized and accepted by the economy. What you're describing is a matter of accounting, I could do it too but it wouldn't create any money. The person who gets the loan usually intends to spend it in the near future, and if that was all it took for there to be a run on the banks then the system would always be in a run. The bank's ability to make good on deposits is limited by the amount of money it has in the accounts it has with other banks and the Fed, and if you trace it back, the federal reserve is the only player who is not limited by that fact.
- jljljl 4y ago
  Well, obviously if you were starting a bank, you'd want a pile of reserves and cash so that this doesn't happen to you on day one. Alternately, you'd offer to hold deposits for some people in exchange for interest, and then lend it out. Your reserve ratio might be close to 100% in this case But over time, as your reputation got better and you gathered more deposits, you would lend out far more than your reserves. You could do this as much as your risk tolerance allowed. Historically, the Fed had a minimum reserve requirement of around 10%, meaning banks needed to have only 10% of the value of their deposits in safe, liquid assets. As of 2020, that requirement was dropped to... 0%
  - eru 4y ago
    > As of 2020, that requirement was dropped to... 0% And that's a good thing! Canada never had a minimum reserve ratio either. https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_... > Canada, the UK, New Zealand, Australia, Sweden and Hong Kong[13] have no reserve requirements.

by jljljl 4y ago

whatshisface 4y ago

>the bank will create the loan (an asset on their balance sheet) and a matching deposit (a liability on their balance sheet). They could do this an unlimited number of times, as long as the deposits they create are recognized and accepted by the economy. What you're describing is a matter of accounting, I could do it too but it wouldn't create any money. The person who gets the loan usually intends to spend it in the near future, and if that was all it took for there to be a run on the banks then the system would always be in a run. The bank's ability to make good on deposits is limited by the amount of money it has in the accounts it has with other banks and the Fed, and if you trace it back, the federal reserve is the only player who is not limited by that fact.

jljljl 4y ago
Well, obviously if you were starting a bank, you'd want a pile of reserves and cash so that this doesn't happen to you on day one. Alternately, you'd offer to hold deposits for some people in exchange for interest, and then lend it out. Your reserve ratio might be close to 100% in this case But over time, as your reputation got better and you gathered more deposits, you would lend out far more than your reserves. You could do this as much as your risk tolerance allowed. Historically, the Fed had a minimum reserve requirement of around 10%, meaning banks needed to have only 10% of the value of their deposits in safe, liquid assets. As of 2020, that requirement was dropped to... 0%
- eru 4y ago
  > As of 2020, that requirement was dropped to... 0% And that's a good thing! Canada never had a minimum reserve ratio either. https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_... > Canada, the UK, New Zealand, Australia, Sweden and Hong Kong[13] have no reserve requirements.