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Fact 1: If you don’t keep several thousands of dollars in your checking account, overdrafting is near the only way your bank makes money on your account. I tho
by EliRivers 13y ago
Fact 1: If you don’t keep several thousands of dollars in your checking account, overdrafting is near the only way your bank makes money on your account.
I thought the bank could make money by lending out a multiple of all the money deposited, such that if I deposit 1000 dollars, they can now lend out on the order of 30000 (i.e. thirty times) that. If they lend that out at, say, 10% interest, they can make 3000 a year because I have 1000 in my account.
The magic of fractional reserve banking. If I've misunderstood this, I'd very much like to be corrected, please.
- zinkem 13y agoI don't think it quite works this way... if you deposit $1000, the bank isn't required to keep $1000 on hand, so with your 1/30 ratio, it means they would hold onto about $34 and loan out the rest with interest. I am definitely not an expert on banking.
- deleted 13y ago[deleted]
- EliRivers 13y agoYou're right in the first step; we can only end up with the 30000 dollars if the money is deposited and relent several times ( http://en.wikipedia.org/wiki/Fractional_reserve_banking#Example_of_deposit_multiplication http://en.wikipedia.org/wiki/Fractional_reserve_banking#Exam... ). The example uses a single bank, but given that all the money goes through various banks as people borrow it and put it somewhere, I could still expect my 1000 dollar deposit to end up in aggregate as a 30000 dollar loan.