A simple explanation of how money moves around the banking system (2013)
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Re: A simple explanation of how money moves around the banking system (2013)
#2The simplest explanation:
- You invest in the bank
- The bank loans your money to someone else at high interest rate
- The bank gets paid, keeps most of the profit and uses a small part of it for your investment.Re: A simple explanation of how money moves around the banking system (2013)
#3The simplest explanation: - You invest in the bank - The bank loans your money to someone else at high interest rate - The bank gets paid, keeps most of the profit and uses a small part of it for your investment.
Simple, but completely wrong. The bank never loans your money. When it wants to originate a loan it creates new deposits from nothing.
Re: A simple explanation of how money moves around the banking system (2013)
#4The simplest explanation: - You invest in the bank - The bank loans your money to someone else at high interest rate - The bank gets paid, keeps most of the profit and uses a small part of it for your investment.
Why post something that was explained as incorrect by the Bank of England in 2014?[0]
Where did you pick this misconception up from?
[0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Re: A simple explanation of how money moves around the banking system (2013)
#5Related:
A simple explanation of how money moves around the banking system (2013) - https://news.ycombinator.com/item?id=9351277 - April 2015 (17 comments)
Re: A simple explanation of how money moves around the banking system (2013)
#6The simplest explanation: - You invest in the bank - The bank loans your money to someone else at high interest rate - The bank gets paid, keeps most of the profit and uses a small part of it for your investment.
Simple, but completely wrong. The bank never loans your money. When it wants to originate a loan it creates new deposits from nothing.
That is not how fractional reserve banking works, people - or, to me at least, it gives a wrong impression.
Say we are in a fractional reserve banking system, where the required reserve is 10%.
I deposit $1M at the bank. My bank can now lend $900K to you. You can now deposit $900K back at your bank. Your bank can now lend $810K to someone else, and so on and so on.
The geometric sum of this is "1/reserve_ratio"; so if there's a 10% reserve ratio, then the initial $1M deposit can lead to $10M of loans outstanding. No single bank is loaning out more than is being deposited with it.
Re: A simple explanation of how money moves around the banking system (2013)
#7Earlier quoted context omitted.
Simple, but completely wrong. The bank never loans your money. When it wants to originate a loan it creates new deposits from nothing.
That is not how fractional reserve banking works, people - or, to me at least, it gives a wrong impression. Say we are in a fractional reserve banking system, where the required reserve is 10%. I deposit $1M at the bank. My bank can now lend $900K to you. You can now deposit $900K back at your bank. Your bank can now lend $810K to someone else, and so on and so on. The geometric sum of this is "1/reserve_ratio"; so i…
This used to be true, but hasn't mattered for a long time.
The reserve requirement is zero for most (all?) US banks.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Re: A simple explanation of how money moves around the banking system (2013)
#8Earlier quoted context omitted.
That is not how fractional reserve banking works, people - or, to me at least, it gives a wrong impression. Say we are in a fractional reserve banking system, where the required reserve is 10%. I deposit $1M at the bank. My bank can now lend $900K to you. You can now deposit $900K back at your bank. Your bank can now lend $810K to someone else, and so on and so on. The geometric sum of this is "1/reserve_ratio"; so i…
This used to be true, but hasn't mattered for a long time. The reserve requirement is zero for most (all?) US banks. https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Strange that private companies are allowed to create money from nothing don't you think?
Re: A simple explanation of how money moves around the banking system (2013)
#9Earlier quoted context omitted.
This used to be true, but hasn't mattered for a long time. The reserve requirement is zero for most (all?) US banks. https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Strange that private companies are allowed to create money from nothing don't you think?
That's how it has been for a while, as the bank of England paper explains.
The key is that the bank is "on the hook" for being able to get that money back eventually. So they don't just loan indiscriminately.
Re: A simple explanation of how money moves around the banking system (2013)
#10Earlier quoted context omitted.
That is not how fractional reserve banking works, people - or, to me at least, it gives a wrong impression. Say we are in a fractional reserve banking system, where the required reserve is 10%. I deposit $1M at the bank. My bank can now lend $900K to you. You can now deposit $900K back at your bank. Your bank can now lend $810K to someone else, and so on and so on. The geometric sum of this is "1/reserve_ratio"; so i…
This used to be true, but hasn't mattered for a long time. The reserve requirement is zero for most (all?) US banks. https://www.federalreserve.gov/monetarypolicy/reservereq.htm
It doesn't matter because no banks have been anywhere near the reserve requirements that were previously in effect. The change to the "ample reserves" regime is just a tacit admission that lending is not functionally limited by reserve ratios in the U.S. at the moment.