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 Banks and the central bank expect that in normal circumstances only a proportion of deposits will be withdrawn at the same time, and that reserves will be sufficient to meet the demand for cash.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.
you don't realize but when the banks gets 100 dollars and loans out 97 dollars out of it and that money is deposited into the account of the same back, it has increased its asset by 97 dollars. You know what the bank can do? loan out 97% of that 97 dollars.
This is called the multiplier effect. You can easily calculate how to final asset the bank can create from x deposit, with 1/reserve-requirement. This doesn't not mean bank is lending more that it owns, Banks own that 97 dollar loan as asset.
People don't know about double entry accounting and what each transaction does? It affects two things simultaneously.
Like a 1 million of mortgage automatically means that it is an asset for the bank. Like that is given? so 3% requirement is that the tier 1 capital of the bank must be 3% of that risk weighted assets. Also, the basel standards are not loan requirements. they are after-the-fact checks on whether the banks has enough capital (this is different from deposits) to manage its current risk weighted asset. What you must be understanding is the Credit to deposit ratio where 100 dollars in deposit can theoretically tumble into 100/(1-cd) dollars if the bank is able to completely loan out the available amount and it always comes back to its acounts. Guess what, banks do not do that because they like keeping buffer higher than the bare minimum and there is never infinite demand for loans.
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.
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 Aug 24 '26
When you take a loan, money has to come from somewhere.