[louloulou]

You should read the article, because it seems you're the one with the misconception.

how it works -> "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans"

not how it works -> "if a bank has $1 million in deposits it can make only $900k in loans"

[kgwgk]

What the article says is that to lend out more than $900k it has to increase it reserves (maybe borrowing from other banks). Not that it can lend out $10m with just $1m in deposits.

“By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending.”

[louloulou]

>through deposits or other liabilities

This is entirely the point. The money created goes back to the bank as deposits and new money is created on top of this.

i.e. 0.9^0+0.9^1+0.9^2+0.9^3+... = 10

[kgwgk]

The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank.

It will typically end in another bank. Then the bank that gave you those $900k still has just $1m in reserves and cannot lend anymore. Unless it gets some deposits or additional funding from another bank (maybe the one where those $900k ended).

It seems we all agree that “if a bank has $1 million in deposits it can make only $900k in loans.” In the aggregate banking system there are now $900k more, some bank may use the reserves created by that deposit to lend $810k, etc.

That’s not the same as

how it works -> "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans"

which is wrong.

[louloulou]

I'm afraid you're simply wrong and need to do some more research. There's no magical point in time where money is "in use". It is always credited to someone's bank account at any given point in time.

The baking system as a whole is leveraged about 9:1 based on the previous example. A bank deposit is a bank deposit, regardless of which bank it is at.

[kgwgk]

You didn’t say

"if the banking system as a whole has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the system banking as a whole can make $10 million in loans" [and there will be in the end $11m in deposits in the banking system as a whole, offsetting the $1m in reserves and $10m in loans]

You said

"if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" [which is wrong unless you assume that every loan remains in that bank as a deposit so the “banking system as a whole” case is recovered]

Of course that bank could get more reserves to be able to make additional loans. But then it could lend much more than $10m if it gets enough deposits/reserves! [One bank =/= The banking system as a whole]

Edit: by the way, I’m curious what is the thing in my previous comment that you find “simply wrong”.

[louloulou]

I mean apologies if I'm misunderstanding what you're saying - but as far as I can tell you're claiming the leverage ratio for a bank is 0.9:1 and I'm saying it is 9:1. If that's the case only one of us can be correct.

It doesn't help that you're conflating the terms "deposits" and "reserves". Deposits are liabilities of the bank, while reserves are assets held in their account at the central bank.

If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1.

[iso1210]

> The money created doesn’t necessarily go back to the bank

Very little will be kept in a matress or burnt. Almost all will go back to a bank.

$1m in Bank A

$1m in bank B

Charlie borrows $900k from Bank B, gives to Dave, puts into Bank A

Eric borrows $900k from Bank A, gives to Felicity, who puts it in bank B.

[kgwgk]

"A bank" is not the same as "the bank".

In your example, the money borrowed by Charlie from B does later go back to bank B.

But if you remove the last transaction it doesn't.

Hence, it doesn't necessarily happen.

[iso1210]

Bank A $0 deposit

Bank B $1m deposit

Total deposits: $1m

Fred borrows $900k from Bank B and gives to Geraldine who puts it in Bank A

Bank A $900k deposit with no loan

Bank B $1m deposit with 900k loan (90%)

Total deposits $1.9m (90% above initial deposits)

Henry borrows 800k from Bank A and gives to Iris who puts it into Bank A

Bank A $1.7m with 800k loans (loans at 60%)

Bank B $1m deposit (loans at 90%)

Total deposits $2.7m (170% above initial deposits)

And the cycle continues, doesn't matter how many banks.