Re: If a bank has $100 in equity and a depositor deposits $100,000 the bank can only lend out $1,000 and not $90,000
Haim, there's more to fractional reserve banking than that.
First of all, the reserve requirement for most deposits is 3%, not 10%. Only deposits above ~$45 million are subject to the 10% number.
And, in general, when a bank lends out $X dollars, they don't really go anywhere. The bank takes a $100k deposit, then creates another account into which the borrower puts the $95k it was "lent" based on that first deposit. Then the bank can lend out $90k based on the "deposit" it just received, etc., etc. until about $1 million gets lent out based upon that $100k deposit. Some of the funds do leave the bank, but on average (viewing all the banks as one system) as much comes back as goes out. If the money is borrowed to buy a car, then whoever sold the car puts the "borrowed" money into some bank account, somewhere, where it becomes a deposit that can be lent out.
The beauty of fractional reserve banking....
And the risk if even a few account holders (whether they're depositor or borrowers) decide that they don't want to keep their money in "the banks" as a system. If ~5% of the deposits were to be withdrawn from ALL banks as a system, the party is over.
It was the risk that enough account holders would get spooked and do so that so terrified the government that it gave in to the wall street thieves. |
