[soVeryTired]

> So actually the banks need deposits to hand out loans. What you are saying is that the deposits get a new label before handing them out as loans?

Well, no. What the BoE paper is saying is this: Suppose there are two banks, A and B.

If Bank A went on a lending spree without attracting new deposits (or otherwise bringing in new reserves), many of the deposits it created would end up with bank B, because bank A has no control over how its deposits are used. Bank A would have to transfer reserves to bank B to settle the transactions. Eventually bank A would run low on reserves and would need to raise more (by issuing debt, or by making its deposit rate more attractive).

But if bank B was going on a similar lending spree at the same time, the two banks wouldn't run down each others's reserves. If the two banks act in tandem (e.g. by getting caught up in speculative mortgage lending), they can create plenty of money without needing to attract new deposits.

The biggest regulatory hurdle that stops this happening is that there's a regulatory constraint on the leverage ratio (assets - liabilities) / assets.