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> In your worldview, where does the money a bank needs to operate from? The answer in the US is simple: the Fed. A bank can make an infinite amount of loans.

> In your worldview, where does the money a bank needs to operate from? The answer in the US is simple: the Fed. A bank can make an infinite amount of loans. They are not constrained by anything. The only "limitation" they have is the future default rate of the people who accept loans from them. The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan. Now, many banks take customer deposits. I think there are 2 reasons they do that: 1. Deposits may be less expensive than borrowing from the Fed. 2. Account holders are warm leads for future loans. But in principle, a bank doesn't have to take any deposits.

NovemberWhiskey 4y ago
>The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan. Ehhh, how does that work exactly? They go up to the discount window and borrow from the Fed every time they issue a loan?
- nordsieck 4y ago
  > how does that work exactly? I don't know. I don't work at a bank. But loans aren't typically available immediately - they take time to clear. It doesn't seem unreasonable to me that they'd bundle the day's loans (or maybe a few hours at a very large bank) to limit the number of transactions they'd have to make.
- alangibson 4y ago
  The money that gets borrowed from the Fed is used to settle balances between banks. When a bank originates a loan, they just add a number to an account. The money doesn't come from anywhere. This works mainly because most money transfers are electronic. tl;dr yes, banks create money out of thin air. It's been this way for decades.
reese_john 4y ago
> A bank can make an infinite amount of loans. They are not constrained by anything. They are constrained by capital and/or reserve requirements > The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan. Nope. Banks can borrow against their government securities from Central Banks by "rediscounting" them during discount windows, should they need extra liquidity. Note that this is not the preferred method since Central Banks usually charges a premium. These are secured loans. See https://www.federalreserve.gov/monetarypolicy/discountrate.htm https://www.federalreserve.gov/monetarypolicy/discountrate.h...
jacquesm 4y ago
> A bank can make an infinite amount of loans. They are not constrained by anything. That's incorrect, there are very strict limits on the solvency ratio placed on the banks that you usually deal with. https://www.investopedia.com/ask/answers/052515/how-are-risk-weighted-assets-used-calculate-solvency-ratio-regulatory-capital-basel-iii.asp https://www.investopedia.com/ask/answers/052515/how-are-risk...

NovemberWhiskey 4y ago

>The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan. Ehhh, how does that work exactly? They go up to the discount window and borrow from the Fed every time they issue a loan?

nordsieck 4y ago
> how does that work exactly? I don't know. I don't work at a bank. But loans aren't typically available immediately - they take time to clear. It doesn't seem unreasonable to me that they'd bundle the day's loans (or maybe a few hours at a very large bank) to limit the number of transactions they'd have to make.
alangibson 4y ago
The money that gets borrowed from the Fed is used to settle balances between banks. When a bank originates a loan, they just add a number to an account. The money doesn't come from anywhere. This works mainly because most money transfers are electronic. tl;dr yes, banks create money out of thin air. It's been this way for decades.

reese_john 4y ago

> A bank can make an infinite amount of loans. They are not constrained by anything. They are constrained by capital and/or reserve requirements > The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan. Nope. Banks can borrow against their government securities from Central Banks by "rediscounting" them during discount windows, should they need extra liquidity. Note that this is not the preferred method since Central Banks usually charges a premium. These are secured loans. See https://www.federalreserve.gov/monetarypolicy/discountrate.htm https://www.federalreserve.gov/monetarypolicy/discountrate.h...

jacquesm 4y ago

> A bank can make an infinite amount of loans. They are not constrained by anything. That's incorrect, there are very strict limits on the solvency ratio placed on the banks that you usually deal with. https://www.investopedia.com/ask/answers/052515/how-are-risk-weighted-assets-used-calculate-solvency-ratio-regulatory-capital-basel-iii.asp https://www.investopedia.com/ask/answers/052515/how-are-risk...