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It's also discounting fractional reserve banking. Banks loan out many times the money you give it. These days 10 time more loans than capital is considered good
by waps 14y ago
It's also discounting fractional reserve banking. Banks loan out many times the money you give it. These days 10 time more loans than capital is considered good, 100 times is the practical maximum you see (except in problematic cases, Greece Spain and the like).
That's why most loans specify that you can't withdraw the money into cash. Even 1% of people doing that would be a "bank run" and bankrupt the bank.
- kragen 14y ago"Fractional reserve banking" with a 10% reserve does not mean that if depositors deposit $1M, the bank then lends out $10M. It means that if depositors deposit $1M, the bank retains $90,910 as a reserve and lends out $909,090. That's how the bank "loans out ten times the money it has". Note that where before we had $1M of "money", now we have $1.91M of "money": the actual money provided to the borrowers, plus the on-demand deposits of the depositors. But the borrowers will probably deposit the borrowed $909,090 in their own bank, which can then lend 90% of it out again. If this procedure is carried out to the limit, you do eventually have 11 times as much "money" floating around the system as the "original" deposit, so the banks in aggregate have loaned out ten times the money originally deposited. What is this about "most loans"? Generally when I've taken out a loan, the loaned money has been spent in something equivalent to cash rather quickly — generally in the form of a transfer to another bank via cashier's check, but that's equivalent from the point of view of the bank!