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by stephen_g
1378 days ago
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A great resource is from the Bank of England (UK central bank) themselves: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... (click through to the main PDF). Key quote: > "Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits." Here's a rundown of what it means by economist Steve Keen who specialises in this kind of stuff: https://www.quora.com/What-is-fractional-reserve-lending/ans... As Keen explains from accounting first principles, fractional reserve could work if banks gave out loans in cash, but not how modern banks work today. What I'm referring to about capital is formalised in the Basel III regulations - see https://en.wikipedia.org/wiki/Basel_III - since we've established that banks don't lend out of deposits, they actually have to cover any delinquent loans from their tier-1 capital (shareholder's equity) - that's what they're leveraging when they lend, not deposits. I can attest to this myself - I've never heard of any bank saying "oh sorry, we couldn't make any more loans because we needed to wait for some more people to make deposits", but as a bank shareholder I have more than once had a letter saying "we need to raise more capital through a new share offering tranche or else our lending projections show we may not be able to meet our capital adequacy ratios" (especially around the time when things were transitioning from Basel II to Basel III because the ratios increased). |
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