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Am I wrong though that if the loan were to default and the depositor tried to withdraw all 1000, the bank wouldn’t be able to return it? Perhaps because of the

Am I wrong though that if the loan were to default and the depositor tried to withdraw all 1000, the bank wouldn’t be able to return it? Perhaps because of the insurance from central banks this problem is avoided.

alangibson 4y ago
That's wrong. The loan amount was never anything but a number that someone at the bank punched into a database. It doesn't have anything directly to do with someone else withdrawing their own money. If the bank is giving cash to the withdrawer, that would come out of their capital reserve I guess. If they didn't have that, they FDIC insurance would kick in.
- HDThoreaun 4y ago
  You’re wrong. If someone took out a loan and withdrew all the money before defaulting the bank would not be able to pay deposits. Insured deposits would be paid by the government and uninsured deposits would go poof. You can say the loan is a number in a database, but once it’s withdrawn from the bank the bank can’t just go into the database and undo the loan.
  - alangibson 4y ago
    Your understanding of banks taking in deposits then lending them out hasn't been true for decades. A bank with no deposits can make loans just fine. They can just borrow at a lower rate than they loan if they actually need to hand out cash. Your example doesn't make much since because any bank has many good loans and a capital reserve to deal with the few bad loans.
    - beowulfey 4y ago
      This was basically what I was asking. Okay so, because the bank has access to an external supply of “money”, they can loan out more than they have in reserve. Thanks!
      - alangibson 4y ago
        Yes, BUT they do not need to get 1000 USD from anywhere to put 1000 USD in your account. They literally just say you have 1000 USD. You can then electronically transfer that to anyone else's bank. The banks then borrow government money overnight to settle accounts. That's the only place government money comes into it. Economists actually refer to the USD in your account as bank money because it did not come from the government. You could just as easily think of that money in your account as a bank issued stablecoin pegged to the dollar that's convertible to dollars.
        kgwgk 4y ago
        > The banks then borrow government money overnight to settle accounts. Maybe that’s already implied in your description but they don’t need to borrow from anyone if they had enough reserves to start with.
    - HDThoreaun 4y ago
      This is expensive. Banks can do this, but it's more of a last resort than the main plan.

alangibson 4y ago

That's wrong. The loan amount was never anything but a number that someone at the bank punched into a database. It doesn't have anything directly to do with someone else withdrawing their own money. If the bank is giving cash to the withdrawer, that would come out of their capital reserve I guess. If they didn't have that, they FDIC insurance would kick in.

HDThoreaun 4y ago
You’re wrong. If someone took out a loan and withdrew all the money before defaulting the bank would not be able to pay deposits. Insured deposits would be paid by the government and uninsured deposits would go poof. You can say the loan is a number in a database, but once it’s withdrawn from the bank the bank can’t just go into the database and undo the loan.
- alangibson 4y ago
  Your understanding of banks taking in deposits then lending them out hasn't been true for decades. A bank with no deposits can make loans just fine. They can just borrow at a lower rate than they loan if they actually need to hand out cash. Your example doesn't make much since because any bank has many good loans and a capital reserve to deal with the few bad loans.
  - beowulfey 4y ago
    This was basically what I was asking. Okay so, because the bank has access to an external supply of “money”, they can loan out more than they have in reserve. Thanks!
    - alangibson 4y ago
      Yes, BUT they do not need to get 1000 USD from anywhere to put 1000 USD in your account. They literally just say you have 1000 USD. You can then electronically transfer that to anyone else's bank. The banks then borrow government money overnight to settle accounts. That's the only place government money comes into it. Economists actually refer to the USD in your account as bank money because it did not come from the government. You could just as easily think of that money in your account as a bank issued stablecoin pegged to the dollar that's convertible to dollars.
      - kgwgk 4y ago
        > The banks then borrow government money overnight to settle accounts. Maybe that’s already implied in your description but they don’t need to borrow from anyone if they had enough reserves to start with.
  - HDThoreaun 4y ago
    This is expensive. Banks can do this, but it's more of a last resort than the main plan.