4 ms·
It's a question of terminology - if you deposit a dollar in a bank, that adds to its reserves (the dollar), and its liabilites (the future dollar and potential
by emn13 3y ago
It's a question of terminology - if you deposit a dollar in a bank, that adds to its reserves (the dollar), and its liabilites (the future dollar and potential interest). The bank wants to make a profit, and legal requirements mean it can invest in risky bets (such as loans) only to a certain degree - but that's still well in excess of 1-1.
In effect, your deposit is directly, causally linked to the ability of the bank to keep more interest _earning_ loans on the books; i.e. your deposit helps back those loans, and were it not for deposit insurance (assuming your account is below the limit) you would be on the hook for risks the bank took.
Your deposits are thus both necessary, and (barring FDIC) risk-carrying when it comes to the loans the bank makes. Isn't that in essence "your" deposit being lent out? If not in a literal sense; then at least what's the value in emphasizing the distinction?
- hgomersall 3y agoBut banks are not in practice limited by reserve availability. A central plank of modern central bank dogma is control of interest rates which is significantly exercised through liquidity loans to banks in order to satisfy their Basel III obligations. That policy goal necessitates free provision of such loans. The reason deposits are desirable is because it's cheaper for the banks to borrow their liquidity from punters than from the inter bank market or from the CB. I guess in some very roundabout way what you say holds some water, but deposits certainly do not limit the ability of the bank to make loans, which is in truth limited by the availability of credit worthy borrowers.