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Banks do not need your deposits to make loans. To be fair, the previous is not 100% correct. They do need some money, but that is just a tiny fraction of the cr

Banks do not need your deposits to make loans. To be fair, the previous is not 100% correct. They do need some money, but that is just a tiny fraction of the credit they issue (how much depends on the risk factor etc.) When you go for a loan, and it is approved, the the bank creates a credit line from which you can draw according to terms in the agreement, and it creates an asset representing the future revenue stream of your payments. No 'money' is directly involved. Once every night a bank's reserves are checked to see wether the bank is in compliance with fractional reserve holdings. Note that while they do need some small % of money at that point, they can actually 'borrow' that money for literally a few seconds, and return it right after the checkup. This is not 'cheating', it is an accepted common practice. That borrowing is not free ofc, so in the long run no bank can stay solvent without having some actual money.

lxgr 3y ago
> they can actually 'borrow' that money for literally a few seconds, and return it right after the checkup This makes it sound like there's some way here for banks to circumvent reserve requirements by timing overnight loans correctly, but that's not really the case. Reserves are accounted for in the same instant for all banks, so you wouldn't be able to do more than the obvious and, as you say, quite expected activity of banks lending excess reserves to other banks that are short. In other words, the "money multiplier" model no longer describes what's really happening. But in fact, reserves play a diminishing role in bank regulation as a whole: Many central banks have stopped enforcing them, not least because central banks themselves will usually lend reserves against commercial loans or equities if banks require it. What matters just as much, and arguably more, are capital adequacy requirements, i.e. a limit on how leveraged banks can be with regards to their equity (i.e. the difference between assets and liabilities): Equity capital serves as a buffer in case of unexpected loan defaults and other losses. This also puts a cap on a bank's maximum leverage, and unlike reserve requirements, there's no way around them by lending or borrowing reserves.

lxgr 3y ago

> they can actually 'borrow' that money for literally a few seconds, and return it right after the checkup This makes it sound like there's some way here for banks to circumvent reserve requirements by timing overnight loans correctly, but that's not really the case. Reserves are accounted for in the same instant for all banks, so you wouldn't be able to do more than the obvious and, as you say, quite expected activity of banks lending excess reserves to other banks that are short. In other words, the "money multiplier" model no longer describes what's really happening. But in fact, reserves play a diminishing role in bank regulation as a whole: Many central banks have stopped enforcing them, not least because central banks themselves will usually lend reserves against commercial loans or equities if banks require it. What matters just as much, and arguably more, are capital adequacy requirements, i.e. a limit on how leveraged banks can be with regards to their equity (i.e. the difference between assets and liabilities): Equity capital serves as a buffer in case of unexpected loan defaults and other losses. This also puts a cap on a bank's maximum leverage, and unlike reserve requirements, there's no way around them by lending or borrowing reserves.