4 ms·

Ok I'll bite. How does the banking system work? Are you just saying banks create loans worth more than the deposits they have, i.e. they have fractional reserve

• bernawil 4y ago
  > fundamentally the incorrect claim that banks lend out their depositors funds Typical arguments against this always end up in "they do lend out their depositors funds" with extra steps. deposits go to their balance sheets as assets and a liability towards the depositor. Banks do business with their assets and some of that business might put their balance sheet in a position where they can't or won't honor their debt to depositors. At that point whether they "lent out depositor's funds" is philosophical.
• neffy 4y ago
  It's statistical multiplexing essentially. To create a loan a bank performs the double entry book keeping operation: [debit loan, credit deposit] Which creates a loan instrument on the asset side, and creates a matching deposit in the borrower's account. When the borrower repays capital on the loan, the operation is reversed. Old time banks would have a roughly 1:1 ratio of loans to deposits, these days because banks are also borrowing from other entities, that can ratio can get a bit squirrel.