[makomk]

Quite. Now suppose you take that $900 you've been loaned and spend a mere $90 of it buying goods from a supplier that uses a different bank. Suddenly your bank cannot meet its reserve requirements. However, if the supplier used the same bank everything would be fine. The amount banks can lend is constrained not by how much deposits they currently have, but whether it could cause a net outflow of deposits to other banks in the future.

Amongst other things, this means that how profligate a bank can be in lending money depends heavily on how much all the other banks are lending. So long as all the other banks are lending just as much out and their savings terms are competitive, the outflow of loaned funds will be balanced by an inflow of other banks' loaned funds. What happens in practice is that there's a glut of easy credit during booms which dries up during busts, making the boom-bust cycle worse. You can find some discussion of this here: http://www.bankofengland.co.uk/research/documents/workingpap...