Banking question

[smokey]

Great and this is where I got my example from my original post. So let me make sure I understand that the author is incorrect about this one point? Is there anything else I should be aware of?

Thanks for the link.

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No.

Griffin is correct technically about how the banks work. He just had credit creation backwards. If new credit was based on reserves it would have no limitation since reserves can be borrowed.

The capacity for new loans is limited by the capital / risk-weighted asset ratio.

He is also a little more conspiratorial than William Greider who wrote Secrets of the Temple, another good book about the Fed.

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[smokey]

Danno is correct about the amount of loans created by the banking system based upon the initial $100 deposit. With a reserve ratio of 10%, for example, the bank that receives the $100 can loan out $90. Then the loan recipient deposits the $90 check in his/her bank and then that bank can loan out 90% of the $90, or $81. The loan recipient of the $81 deposits the $81 check into their bank and then that bank can lend 90% of the $81, or $72.90. The 90% of $72.90 gets loaned or $65.61. and so on. If you add up all these loans it will be $900.

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That example would be correct if banks could not borrow reserves.

The reason the money multiplier seems accurate is that with a 10% reserve requirement ratio, a new loan deposited in another bank would allow that bank to loan 90% of the new deposit without falling short on reserves when payment was made for the new deposit at another bank.

However a bank with good credit can borrow reserves in the Fed Funds market, the repo market or directly from the Fed at the Discount Window. Therefore the reserve requirement ratio does not limit the amount of new credit a bank can create.

New credit is restricted by the Fed's version of the Basel I Accord wherein new loans are limited by the ratio of capital to risk-weighted assets. Risk-weighted assets are composed of cash, treasuries, interbank loans, mortgage loans and other loans.

The reason for the reserve requirement ratio is to ensure that banks have enough cash to cover payments to customers and other banks.

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[anaconda]

when payment was made for the new deposit at another bank.

What do you mean by "payment for the new deposit at another bank?"

 

[smokey]

What do you mean by "payment for the new deposit at another bank?"

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In your example, "the bank that receives the $100 can loan out $90." It can only loan out $90 because if it loaned the full $100, and it was deposited in another bank, the first bank would come up short of reserves by $10 when payment was made. Since that $100 is in deposits, it must retain $10 in cash or reserves at the Fed.

This is how a pure fractional reserve system would work. However since banks can borrow reserves in our system, the reserve requirement ratio does not limit the creation of new loans.

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[forsmant]

delete please moderator


Moderator: my posts are posting double...

Is this on my end or are you getting this from other forum members?

Thanks.

Reply with quote?

I get this occasionally as well.

 

[gonegolfin]

Danno is correct about the amount of loans created by the banking system based upon the initial $100 deposit. With a reserve ratio of 10%, for example, the bank that receives the $100 can loan out $90. Then the loan recipient deposits the $90 check in his/her bank and then that bank can loan out 90% of the $90, or $81. The loan recipient of the $81 deposits the $81 check into their bank and then that bank can lend 90% of the $81, or $72.90. The 90% of $72.90 gets loaned or $65.61. and so on. If you add up all these loans it will be $900.

Once again, this was not the question/statement post that was cited. From the original poster ...

"I deposit $100 into a bank. Now the bank can lend $900 out, even though it doesn't have $900 it just makes the money out of nothing."

I specifically cited that the bank could not lend $900 out from the original $100 deposit (which is a mistake cited in internet videos and writings I have seen). It can only lend $90 from this deposit. I said nothing about the eventual loans that could be created from the original $100, which requires additional deposits.

Brian

 

[sratiug]

A lot of people seem to get confused about fractional reserve banking and the fed's ability to create money out of thin air. They are not the same thing. I actually think fractional reserve banking is good thing. I think we should abolish the FDIC and let private insurers step in, but overall fractional reserve banking benefits our economy. I have never understood why people in the liberty movement, who claim to support liberty in all forms, want a coercive government to interfere with the individuals right to bank how he chooses (fractional reserve).. It just doesnt make sense.

Because they are for private property rights and that makes them against fraud. If I open a parking garage and then rent out 90% of your car would you be happy when you get it back and it has lost value. Or would you be happy when you can't get it back because you tried wanted it during rush hour when everybody else needed a car too.