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Can you elaborate this. Is it possible for a regular bank to lend money it does not have?

by blackoil 4y ago

whatshisface 4y ago
They're allowed to borrow from the federal reserve which is allowed to lend an infinite amount.
- acjohnson55 4y ago
  Banks aren't allowed to borrow infinite amounts of money from the Fed. If they could SVB would still be ticking.
- deleted 4y ago
  [deleted]
- runlaszlorun 4y ago
  They can borrow easily but it’s still a liability, right? I think people here the borrowing part and don’t know the liability part.
- SideQuark 4y ago
  They borrow and repay with interest, so the don't borrow unless they have some use for the money that will return value to the borrower, and some profit to the bank, in order to repay the loan the bank got.
throw0101c 4y ago
> Is it possible for a regular bank to lend money it does not have? Banks create money from nothing to lend out: > Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account. > This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth. * https://www.bankofengland.co.uk/explainers/how-is-money-created https://www.bankofengland.co.uk/explainers/how-is-money-crea... > This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’. * 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... Money is a psychological construct of humans to facilitate trade and the exchange of goods and services. Some societies don't (didn't) even have money/currency: everyone kept a mental 'tally' of who gave or took things, and there were social expectations of giving "gifts" for repayment. Physical tokens (bones, shells, gold, paper, etc) came later.
trifurcate 4y ago
That's not what GP is saying. When reserve requirements are low, banks are essentially no longer forbidden from lending out other customers' deposits. When you decrease the reserve requirement, you're unlocking reserves that were previously locked up to back your deposits so that they can be loaned out to other customers, who will then promptly either directly or indirectly end up depositing their loaned amount into the banking system again, where the part that remains after the reserve requirement once again gets loaned out, deposited back in, etc. In effect, because you're making this money go around, you're increasing the total supply of money, because these deposits are the money supply, and there can and often is more than a $1 net increase in overall deposits for each $1 deposited with a bank. Another way to state it is like so: you deposit $1, bank loans out $0.90, someone else deposits that $0.90, their bank loans out $0.81, so on and so forth for $10 of net deposit generation for a $1 initial deposit at 10% reserves held. Of course, individual banks can elect to lock up more reserves than necessary, which would negate this effect.
stephen_g 4y ago
The posts above are incorrect about how banks work, but your question is spot on. Actually, banks always lend out money they don’t have - they can’t actually “lend deposits”. The risk of what banks do is why banking licenses are hard to get and it’s so regulated. This primer from the Bank of England is very clear: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

Can you elaborate this. Is it possible for a regular bank to lend money it does not have?

whatshisface 4y ago

They're allowed to borrow from the federal reserve which is allowed to lend an infinite amount.

acjohnson55 4y ago
Banks aren't allowed to borrow infinite amounts of money from the Fed. If they could SVB would still be ticking.
deleted 4y ago
[deleted]
runlaszlorun 4y ago
They can borrow easily but it’s still a liability, right? I think people here the borrowing part and don’t know the liability part.
SideQuark 4y ago
They borrow and repay with interest, so the don't borrow unless they have some use for the money that will return value to the borrower, and some profit to the bank, in order to repay the loan the bank got.

throw0101c 4y ago

> Is it possible for a regular bank to lend money it does not have? Banks create money from nothing to lend out: > Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account. > This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth. * https://www.bankofengland.co.uk/explainers/how-is-money-created https://www.bankofengland.co.uk/explainers/how-is-money-crea... > This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’. * 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... Money is a psychological construct of humans to facilitate trade and the exchange of goods and services. Some societies don't (didn't) even have money/currency: everyone kept a mental 'tally' of who gave or took things, and there were social expectations of giving "gifts" for repayment. Physical tokens (bones, shells, gold, paper, etc) came later.

trifurcate 4y ago

That's not what GP is saying. When reserve requirements are low, banks are essentially no longer forbidden from lending out other customers' deposits. When you decrease the reserve requirement, you're unlocking reserves that were previously locked up to back your deposits so that they can be loaned out to other customers, who will then promptly either directly or indirectly end up depositing their loaned amount into the banking system again, where the part that remains after the reserve requirement once again gets loaned out, deposited back in, etc. In effect, because you're making this money go around, you're increasing the total supply of money, because these deposits are the money supply, and there can and often is more than a $1 net increase in overall deposits for each $1 deposited with a bank. Another way to state it is like so: you deposit $1, bank loans out $0.90, someone else deposits that $0.90, their bank loans out $0.81, so on and so forth for $10 of net deposit generation for a $1 initial deposit at 10% reserves held. Of course, individual banks can elect to lock up more reserves than necessary, which would negate this effect.

stephen_g 4y ago

The posts above are incorrect about how banks work, but your question is spot on. Actually, banks always lend out money they don’t have - they can’t actually “lend deposits”. The risk of what banks do is why banking licenses are hard to get and it’s so regulated. This primer from the Bank of England is very clear: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...