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> Banks lend at certain multiples of assets, 10:1. No this is wrong. They can not loan out more than total deposits. The trick is that if you deposit 100, they

by ahtihn 4y ago

> Banks lend at certain multiples of assets, 10:1. No this is wrong. They can not loan out more than total deposits. The trick is that if you deposit 100, they can loan out 90. It gets deposited with them, so they can loan out another 80 and so on. (Actual numbers may differ). This is how you get the 10x multiplier. But they can not loan out more than total deposits. If they could, why even bother with deposits at all?

kasey_junk 4y ago
They absolutely _can_ lend out more than they take in. They tend not to because their owners are risk adverse and depositors get precedence in receivership. But you can find banks with 6 or 7 to 1 LTD (I’d not want to be invested in one). You bother with deposits for a few reasons a) banks get a lot of power assuming they’ll play a public good in the form of managing deposits and b) they can earn more using the deposits than they have to pay out to depositors.
junofan 4y ago
Nope. Pretend I’m a bank with no assets and no debt, and I give you a loan for $100. I then have $100 in assets and $100 in liabilities. When you withdraw the $100 loan, I borrow from another bank or from the central bank, and give you that money. I collect deposits because it’s a cheap source of liquidity.
- deleted 4y ago
  [deleted]
- kasey_junk 4y ago
  Critically, your asset is the loan, the liability is the deposit credit in the borrowers account but you have zero liquidity and are actually done for when they ask for the money. So you either need to borrow the money from another entity (if perhaps you were better at loan origination) ahead of that, or more likely use owner equity to payout the loan.
  - neffy 4y ago
    Which is where the capital that is required to create the bank comes in, since that provides the initial (cash) liquidity.
neffy 4y ago
This is the classic description found in the economic textbooks. Unfortunately it is incorrect, the system doesn't work that way. (See comments above). apropos btw. I've never actually seen a banking system that has a 10% ratio, I think that was Keynes chosing easy numbers. The reserve ratio back in his day was more like 20-25%, these days it is down to about 1-2% in most countries, and being replaced with terms like "required liquidity ratios".

by ahtihn 4y ago

kasey_junk 4y ago

They absolutely _can_ lend out more than they take in. They tend not to because their owners are risk adverse and depositors get precedence in receivership. But you can find banks with 6 or 7 to 1 LTD (I’d not want to be invested in one). You bother with deposits for a few reasons a) banks get a lot of power assuming they’ll play a public good in the form of managing deposits and b) they can earn more using the deposits than they have to pay out to depositors.

junofan 4y ago

Nope. Pretend I’m a bank with no assets and no debt, and I give you a loan for $100. I then have $100 in assets and $100 in liabilities. When you withdraw the $100 loan, I borrow from another bank or from the central bank, and give you that money. I collect deposits because it’s a cheap source of liquidity.

deleted 4y ago
[deleted]
kasey_junk 4y ago
Critically, your asset is the loan, the liability is the deposit credit in the borrowers account but you have zero liquidity and are actually done for when they ask for the money. So you either need to borrow the money from another entity (if perhaps you were better at loan origination) ahead of that, or more likely use owner equity to payout the loan.
- neffy 4y ago
  Which is where the capital that is required to create the bank comes in, since that provides the initial (cash) liquidity.

neffy 4y ago

This is the classic description found in the economic textbooks. Unfortunately it is incorrect, the system doesn't work that way. (See comments above). apropos btw. I've never actually seen a banking system that has a 10% ratio, I think that was Keynes chosing easy numbers. The reserve ratio back in his day was more like 20-25%, these days it is down to about 1-2% in most countries, and being replaced with terms like "required liquidity ratios".