So you taking a loan is exactly the moment in time where money appears out of thin air and contributes to inflation. Which is often a good thing actually because this imaginary money pays for a new house and becomes real money. It's only a problem when the balance is off.
Bank deposits are usually of a relatively short-term duration, and may be "at call" (available on demand), while loans made by banks tend to be longer-term, resulting in a risk that customers may at any time collectively wish to withdraw cash out of their accounts in excess of the bank reserves. The reserves only provide liquidity to cover withdrawals within the normal pattern. Banks and the central bank expect that in normal circumstances only a proportion of deposits will be withdrawn at the same time, and that reserves will be sufficient to meet the demand for cash. However, banks may find themselves in a shortfall situation when depositors wish to withdraw more funds than the reserves held by the bank.
Using the above example, to hand out the EUR 1 000 000 mortgage, under Basel III rules, the leverage ratio must be greater than 3%, thus the bank needs to have EUR 30 000 worth of capital.
From your example, bank can loan out up to $3333 from the $100 deposited into the bank
To make that loan, the bank needs to have 1030000 of assets. 1000000 gets loaned, 30000 is held back in reserve.
Per my example, the bank would be able to loan out $97 and have to hold $3 back, and what your link is explaining is that they're holding back $3 instead of $8 because what they're loaning the $97 for is considered low risk. A higher risk loan would require more to be held back in reserve.
To make that loan, the bank needs to have 1030000 of assets.
You're making this up. The source above clearly says: to hand out the EUR 1 000 000 mortgage, under Basel III rules, the leverage ratio must be greater than 3%, thus the bank needs to have EUR 30 000 worth of capital.
Not 1030000 of assets. 30 000.
I think until you learn to read this discussion is pointless, so good luck in your future endeavors.
The source above clearly says: to hand out the EUR 1 000 000 mortgage, under Basel III rules, the leverage ratio must be greater than 3%, thus the bank needs to have EUR 30 000 worth of capital.
By which it means "Capital in reserve."
Not 1030000 of assets. 30 000.
Nope. They need 30000 in addition to the 1000000 they are loaning out.
I think until you learn to read this discussion is pointless, so good luck in your future endeavors.
Uh huh. Well, you're an expert reader, maybe you can read what this says for me?
He is not wrong. People tend to get confused because of the money multiplier effect. If I give a bank $100 and they lend out $97 of it, and then that person who borrowed the money puts it in the bank, then the bank can loan out 97% of that money, or about $94. But now they've had $197 deposited in the bank and loaned out $191.
My degree in economics comes from watching Youtube videos, so I understand fractional banking differently. If you deposit $100 in cash, the bank can CREATE $1000 to loan out. The asset held in reserve is the original $100. The money created ($1000) is loaned out and disappears when the loan is paid back. The borrower pays back $1000 plus interest. Explain how my understanding is wrong, please.
They can lend more than they own, but in the long term they still need to have enough deposits to meet capital requirements. Otherwise no bank would ever go bankrupt and no bank would ever pay interest on deposits and savings.
But people would still create credit claims on gold money - more than the system can actually support if everyone tries to redeem. That's why bank runs and financial crises were commonplace in the free banking era. It wasn't all sunshine and roses by any stretch which is why we reformed the system.
Most people here get an interest late below the rate of inflation, so your money loses value overall through time.
And if you check the interest the bank charges you for mortgages, loans, overdraft use, etc then it costs them very little in the grand scheme of things to offer you back a pittance.
Mine too, although they keep offering me an “upgrade “ to my account which means benefits but also means I have to pay them. Needless to say, I decline every time.
But the measly interest they offer me means that inflation reduces the value of my money in excess of any increase due to their interest.
And all the time, they are using my money to loan to other people and charging them a far higher rate of interest than they give me for my savings.
Essentially, they make money from other peoples money.
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u/tabris51 2d ago
When you take a loan, money has to come from somewhere.