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You are confused about how fractional reserve works. The 10x multiplier is on the bank's equity. For every dollar of home loan there is a dollar or more of dep
by Danieru 4y ago
You are confused about how fractional reserve works.
The 10x multiplier is on the bank's equity. For every dollar of home loan there is a dollar or more of deposits.
The multiplier effect of fraction reserve occurs over iterated loans and depositing. The fraction term comes in because the bank can lend out a fraction, less than 1, of deposits.
- jrockway 4y agoYup. A bank run is problematic because if you keep 99% of the money but 100% of your customers want cash today, then you're screwed.
- hnfong 4y agoThe more modern treatment of this situation is that if you sold the mortgage on the open market as a mortgage backed security you might still be solvent as long as the MBS is valued at least at face value. The real problem with failing banks is that interest rates rose steeply, and thus the MBS devalued by a significant amount.
- terragon 4y agoThis is incorrect. Fractional reserve lending means that they can keep a fraction of deposits as reserve and loan out the rest. This necessarily means they are not fully covered in times of large withdrawals.
- Danieru 4y agoSorry, you are not getting what OP was confused about. The OP thought 10dollar of loans existed for every 1dollar of deposits. That is what I address. Instead for every say 9 dollars of loans there exists 10dollars of deposits. You are agreeing with me. The outstanding loans are/should never be greater in value than the outstanding deposits. Aka: they should be a sub 1.0 fraction. Of course the fraction reserve aspect is the inverse ratio, itself also below 1.0.