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Deposits have nothing to do with capital. If you have 1B in assets and 12B in liabilities you are insolvent.
by aj12345 13y ago
Deposits have nothing to do with capital. If you have 1B in assets and 12B in liabilities you are insolvent.
- fleitz 13y agoThere's one of two possibilities, either I'm wrong and capital requirements don't work like that, or every bank in the world is insolvent. Given Quantitative easing 1,2,3,etc which do you think is true? You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember, all I'm offering is the truth – nothing more.
- rayiner 13y agoSo from a bank's perspective, a loan is an asset and a deposit is a liability. Say someone deposits $100 cash (federal reserve notes) into Bank A. Let's say the reserve ratio is 20%. It takes $80 and loans it to someone, who deposits in the same bank. It then takes $64 of that and loans it to someone who deposits in the same bank. It then takes $51 of that and loans it to someone who takes out cash and holds it. The bank has the following assets: $20 + $16 + $13 in reserve, plus loans of $80 + $64 + $51 = $244. It has the following liabilities: $100 + $80 + $64 = $244. Now, if those loans don't get repaid, the bank might not remain solvent, but that has nothing to do with fractional reserve banking. Any entity that is solvent on the books can be rendered insolvent by loans going bad.