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Comment by kaibee | Hacker News Reader

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.

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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?

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...

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

> 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

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