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So, you're saying that a bank can leverage a $100 deposit to make a $9900 loan, so long as it can borrow the $9900 from another bank in the event that the perso
by jackgavigan 12y ago
So, you're saying that a bank can leverage a $100 deposit to make a $9900 loan, so long as it can borrow the $9900 from another bank in the event that the person it has made the loan to wants to actually withdraw the $9900.
- nhaehnle 12y agoCorrect. Furthermore, if no other bank is willing to lend this amount, then the central bank will do so as part of its purpose as lender of last resort (so the condition in your "so long as" is always satisfied). Note, however, that lending is subject to unrelated constraints, in particular the capital requirements that I've mentioned.
- jackgavigan 12y agoNo, you're not correct. You are conflating a number of different things (e.g. fractional reserve banking, interbank lending, capital adequacy requirements) to come up with a deeply flawed understanding of how banks are regulated.
- nhaehnle 12y agoEvidence that the statements made in my previous comment are correct: http://en.wikipedia.org/wiki/Discount_window http://en.wikipedia.org/wiki/Discount_window This is what I meant by saying that even if a bank fails to borrow from other banks to satisfy its reserve requirements, it can just go to the central bank to get the required money, and that therefore reserve requirements are not a constraint on lending. By the way: In case you haven't heard of it, read the Modern Monetary Theory Primer here: http://neweconomicperspectives.org/modern-monetary-theory-primer.html http://neweconomicperspectives.org/modern-monetary-theory-pr... It's very long, and there are a lot of macroeconomic statements in there that can be disputed, but their description of how the monetary system actually works is spot on and well organized.