Hacker News Reader

Comment by namdnay | Hacker News Reader

> When you have literally a license to create money out of thin air

This is a common but slightly misleading interpretation of fractional reserve banking.

If I lend you 100 bucks and you lend those 100 bucks to someone else, you’ve “created 100 bucks” in a monetary sense. But it’s not coming from thin air, from an accounting perspective it’s just a debt moving from one person to another

View on HN

There are no fractional reserve requirements anymore. And (almost) all money is debt anyway, even by definition with some definitions.

"As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

There are lots of reserve and stress testing requirements on banks, and banks are usually public companies whose finances their investors can read, and they often fail when the investors decide the finances look bad.

https://www.investopedia.com/terms/b/basell-iii.asp

There are, but the lack of reserve requirements make the widespread idea that banks are lending other people's deposits out is even more wrong.

The effectiveness of these "stress tests" remain to be seen. There was widespread trust for the "financial innovations" "pricing risks" until the system turned out to be a total scam.

there are still capital rserve requirements. but imagine we ignore all of that: yes, so they're lending out 100 bucks from the 100 bucks i gave them. they're still not "printing money" - everything they give is what i gave them

you're forgetting the next person they give that 100 bucks to, deposits that money (if not completely spent) into a bank, which is again used to lend out more money.

Yes, but when I deposit $100 with @Bank (ie, effectively lending $100 to the bank), they aren't loaning out $10 to a couple people, they're lending out $100 to a couple people, because they did the math and figured that they can get most of those people to pay them back before I ask them for my $100 back. This is all well and good, but they really are creating money out of thin air when they're loaning out more money than they actually have on hand.

This makes no sense. If the bank lends $100 each to two people, it has to be prepared for them to take that money and spend it more or less immediately - on a house, or payroll, or whatever. When you put your $100 into the ATM, and two people get $100 bills from the ATM, where does the second bill come from?

The bank lends an amount at 7%. The individual immediately pays the full amount into someone else's bank account. If the bank needs cash (which it probably doesn't on a day to day basis because most of its depositors leave money where it is) it can borrow that amount from the other bank at 5.5% and profit from the margin. So the amounts are eventually consistent.

That's the basic logic: modern banking adds in a central bank that guarantees that it will lend enough to solvent banks at 5.5% to meet their customers' withdrawal requirements even if everyone pulls money out, banks treating each others' credit as equivalent in value to cash because they can always convert it, and a bunch of rules about lending needing to be banked with bank capital and other weighted assets to keep lending growth from being silly.

yes exactly. whereas the person above was arguing that they can just lend out money that wasn't deposited, which is pure fiction

Only something like 10% of the world's money are physical bills and coins. The rest is electronic, just numbers in reputable databases.

The bank can rely on this fact. It only needs enough notes to support a likely amount of physical cash withdrawals each day.

> The rest is electronic, just numbers in reputable databases

yes, but they can't fiddle those numbers. if you deposit 100$, they can lend up to 100$. no more

That's not how the banking system works in theory or practice. It hasn't worked like that for a very very long time.

Lending isn't limited by deposits, it's limited by central bank regulations.

Here's what the Bank of England says [0]

> if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.

> Regulation limits how much money banks can create.

Banks only need to maintain enough deposits to cover their liquidity needs - what they need to pay people withdrawing cash and what they need to transfer to other banks due to electronic money moving.

[0] https://www.bankofengland.co.uk/explainers/how-is-money-crea...

> it has to be prepared for them to take that money and spend it more or less immediately

Right, but the bank also knows that people are doing the exact same thing with other banks; borrowing money from the other bank which will get spent immediately back at this one.

Banks are prepared to meet the difference in money in and money out, they're not prepared to meet the total volume of deposits. When the bank gets this wrong there's a liquidity crisis (or a bank run) which causes Big Problems.

> they're lending out $100 to a couple people

no they're not, they're loaning out 100$ total. they never have loaned out more than they had on their books, it's not possible

Banks can and do loan out more money than they have on deposit; they borrow from the central bank in their jurisdiction when required.

https://en.wikipedia.org/wiki/Fractional-reserve_banking

Reply on news.ycombinator.com