it's called fractional reserve because the $10 deposit becomes the basis for $100 in unbacked loans. banks do not lend deposits. if all banks did was lend deposits they wouldn't be inflationary. every dollar of a loan spent would represent real productive value already earned.
an unbacked loan, in comparison, injects future money into today (for some fee). It represents value not yet actually created and is thus inflationary.
ok. do banks loan out $9 of a $10 deposit at all?
or do they not loan out $9 of a $10 deposit at all?
if they do loan out $9 of a $10 deposit as a matter of actual policy and regulations what do they call that?
individual deposits aren't accounted that way. banks balance assets and liabilites. so say I am a bank and I need to have more assets than liabilities (to stay solvent). I take your $100 deposit and promise it back to you anytime you want it. Knowing that on average you keep, say, $75 in the bank at all times (banks use running averages of demand deposits and make up any differences with small inter-bank trades) I use that $75 as a basis to make unbacked loans of $750 to other people. Due to legal tender laws I am allowed to simply write the amount of the loan into other people's accounts. these loans have value and become assets that balance with the liabilities of demand deposits.
of course assuming a price is dumb. price only exists when an actual sale took place. this is what we saw in the financial crisis. every bank assumed that they could sell lonas for X, when the time came to actually sell some loans everyone was trying to sell loans at the same time. the price tanked, boom, toxic assets. You were relying on the "paper price" of your loan to balance your liabilities and stay solvent, your paper price was an unjustified assumption.
nazgulnarsil: individual deposits aren't accounted that way. banks balance assets and liabilites. so say I am a bank and I need to have more assets than liabilities (to stay solvent). I take your $100 deposit and promise it back to you anytime you want it. Knowing that on average you keep, say, $75 in the bank at all times (banks use running averages of demand deposits and make up any differences with small inter-bank trades) I use that $75 as a basis to make unbacked loans of $750 to other people. Due to legal tender laws I am allowed to simply write the amount of the loan into other people's accounts. these loans have value and become assets that balance with the liabilities of demand deposits.
How is a $750 asset equal to a $75 liability? Do they multiply by the reserve ratio to treat the loan as $75 again, or...?
What happens when the loans are repaid? Is that $750 plus interest used as the basis of new loans at all, or does the bank keep it as profit?
banks aren't just liable for demand deposits, they're also responsible for the difference between the total value of a loan and its present value, and for various other investments the bank makes.
when loans are paid back checkbook money is destroyed, the only money the bank gets to keep is the interest.
12-27-90
the above linked info indicates that the maximum reserve ratio (if true) is 10 percent.
do many banks only keep the required reserve ratio for the specified amounts listed above? i dont know.
but that still certainly sounds like fractional reserves held in banks....maybe an asset is worth something one day and it is worth less the next....the balance analogy doesnt seem accurate to me.
There's no reserve ratio in Australia and our banks currently have $1.338 trillion worth of deposits and only $6.7 billion in notes, coins and deposits due from the reserve bank. That works out as a reserve ratio of 0.5%.
I might add that our central bank pumped plenty of cash into the banks between Sept - Dec 2008, increasing reserves 380% in three months (to a reserve ratio of a mighty 2.2%!).
Those reserves have since declined 436%. I wonder where all the money went? I might add that inter-bank loans, housing loans, personal loans, the share market and bonds (both government and corporate) have seen plenty of growth over the past 8 months -- hey, that was right after the RBA increased bank reserves. What a coincidence!
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