| >> Banks don't generally lend out deposits. I think this is one of those "technically true" things, but it works out very similarly. You deposit $1 with the bank. The bank now has a liability to you of $1, and deposits the $1 with the bank's bank (often the central bank). hand waving Separately, the bank is able to negotiate for loans from the central bank. This is on the basis of its demonstrated capital controls, liabilities, deposits (with the central bank, including your $1), business plan, etc. When the bank receives a loan from the central bank, there isn't necessarily any cash moving around. It's literally just numbers in a ledger, and a system of governance where eventually guys with guns will liquidate the bank's property if they don't handle things properly. The central bank wants a cut of the action in terms of the prime rate. Whether the local bank can lend directly from deposits depends on how much control the central bank wants to exert, since this is an end-run around the monetary policy and oversight. |
This is not how it works. You deposit $1 with the bank and create a liability. The same day, another branch makes a loan and creates new deposits from thin air. At the end of the day, the bank figures out its reserve position. If it is short, it borrows reserves from other banks.
Loans precede deposits. Always.