> but if the loan is profitable the bank can always borrow the reserves at a lower rate on the interbank market.
They're still loaning out deposits, though. They're just borrowing someone else's deposits to do it.
They're still loaning out deposits, though. They're just borrowing someone else's deposits to do it.
I'm not the GP here but his point is that actually the bank in general does not loan out deposits[0].
Instead, the bank creates money at the moment a counterparty agrees to borrow it (in countries with a certain type of financial system, aka most countries today, with some interesting exceptions).
The name for an institution that loans out deposits is "credit union," but most people think that's what a bank does.
Most people are very surprised by this claim that ordinary banks create money, and deny it when you tell them. But really there's no coverup of this fact, it's written e.g. literally on the websites of most central banks such as e.g. [1], wherein the critical passage (in boldface on the first page) is:
"Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money."
This seems unjust to most people, since in our daily experience, money is not a thing which is very commonly created. I take no position on that alleged injustice here, and instead leave it as an exercise for the reader to reason out the consequences of a private-bankers-printing-money themed financial system (of which consequences there are many) and to ponder the identities of the people doing most of the printing.
[0] Sometimes it actually does turn out that a bank loans out a deposit, as the GP mentions, but this is by construction a small fraction of bank business.
[1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
And is there a special license for being allowed to create money?
The difficulty is not in letting people make accounts and setting balances on those accounts. The difficulty is getting everyone to not immediately withdraw the entire balance as cash.
There are regulatory hurdles, but they're very much secondary.
If everyone immediately took loans in cash form and they never got deposited back to banks, then banks wouldn't be able to create money via loans either.
Banks count on (depend on!) there not being a run on the banks, and they count on borrowers to not default at a higher-than-expected rate. As long that is the case, the banks thrive, the borrowers thrive, and the savers thrive. If however, the economy tanks hard enough, then too many borrowers go broke, savers get scared and ask for their money back, and the banks go bust.
Banks lever capital (paid up shares and retained profits) to create money for loans, not deposits. Existing deposits are funding for interbank settlements (for transfers).
The amount of reserves the bank has doesn’t actually affect lending one bit - it does affect liquidity but most countries don’t even have reserve requirements because banks can just borrow reserves from other banks or the lender of last resort (central bank) if they need to. The main bank regulation now is capital adequacy ratios.