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Comment by mordae | Hacker News Reader

They still have to borrow the money from the central bank. Fractional reserves mean that the credited account's bank must deposit a portion of the money bank at central bank.

So there is a limit to how much money can the bank create.

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Mostly banks borrow from depositors and from the capital markets.

Reserve requirements of that type still do exist in some places (though in some places they've been abolished) but don't really play much of a role in determining how quickly money supply grows any more.

Control over money supply growth is mostly down to interest rates these days.

Similarly, the role reserve requirements used to play in protecting depositors has been replaced by the various "Basel" rules which determine what sources of funding banks can use to fund their loans which depend on the loan book's credit quality, tenor etc.

Banks don’t borrow from depositors.

Loans create deposits and the deposits just change ownership tag from then on.

I mean, they do, to the extent that people walk into banks and hand over wads of cash for deposit. I.e. it happens, but increasingly rarely.

How did you get the wad of cash in the first place and what is it?

A wad of cash isn’t money. It is nothing more than a receipt for a deposit held at an institution somewhere - that was created as an advance in the past in response to an equivalent loan.

When you deposit a wad of cash in a bank, the bank takes ownership of the deposit in the institution and creates a new deposit in the bank for you. It’s just another loan creating a deposit.

A deposit is literally you lending money to your bank, payable on demand.

That’s not the point. The point is where what you have came from in the first place.

A loan creates an advance. That advance is the bank owing a person in return for the person owing the bank.

The advance is then used to pay you so you have a deposit. All that does is change the ownership tag on the advance.

They must only borrow the money (or get it from somebody else who got it from somebody who borrowed it from the central bank) that they need to pay you out in paper or digital cash and the money they have to keep in reserve. They do not have to borrow the whole credit value. The credit itself is created out of thin air but with some strings attached, so banks can't just create infinite amounts of credit and they cannot just pay out arbitrary sums of created credit. (Source: Some books I read a long time ago.)

> The credit itself is created out of thin air but with some strings attached

Yes - via the central bank, right? I thought that was how quantitative easing worked.

QE is a separate process from the usual act of money creation by banks making loans, it's best to consider it as an out-of-the-ordinary manual intervention by the central bank where they create new central bank money ad hoc and use that to purchase assets on the market. The normal process of money creation is banks creating new commercial bank money when making loans to individuals and companies.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

>They still have to borrow the money from the central bank. Fractional reserves mean that the credited account's bank must deposit a portion of the money bank at central bank.

Absolutely false. For starters, in many jurisdictions including the US, the reserve fraction is now 0% and has been for quite some time.

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

They don’t. Reserves are irrelevant for bank lending.

They are nothing more than a centralised optimisation of what would otherwise be a full mesh network of point to point exchanges

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