Turn on thread page Beta
    • Thread Starter
    Offline

    0
    ReputationRep:
    Hello everybody!

    I learnt at University that banks lend the money deposited and hold a small portion of these deposits within their vault to meet customers' withdrawals, while the rest of the deposits can be loaned out to the public (as not part of the reserve requirement). And all of that makes sense considering the fractional-reserve banking system.

    I have recently read an article by the Bank of England regarding money creation. The article states that banks do not act as simple intermediaries only receiving deposits and lending them to the public but, in reality, banks actually create money through lending. The money multiplier model is then not to be taken as the main way through which money is created. It is rather the act of lending that creates deposits. In fact, when a bank makes a loan, it credits the lender's bank account with a bank deposit of the size of the loan. At that moment, new money is created. There are of course restrictions that limits how much banks can lend.

    What the article says is much different to what I have learnt.

    I get the impression that, under the “loans create deposits” model, there are no risks of not meeting customers withdrawals, as the deposits are not lent out to the public. Are deposits kept as vault cash? Do then capital and reserve requirements still apply under these circumstances? If banks do not lend deposits out, what would be the purpose of keeping reserve requirements?

    Thank you.
 
 
 
Reply
Submit reply
Turn on thread page Beta
Updated: January 29, 2016

University open days

  1. University of Edinburgh
    All Departments Undergraduate
    Sat, 22 Sep '18
  2. University of Exeter
    Undergraduate Open Days - Penryn Campus Undergraduate
    Sat, 22 Sep '18
  3. Loughborough University
    General Open Day Undergraduate
    Sat, 22 Sep '18
Poll
Which accompaniment is best?

The Student Room, Get Revising and Marked by Teachers are trading names of The Student Room Group Ltd.

Register Number: 04666380 (England and Wales), VAT No. 806 8067 22 Registered Office: International House, Queens Road, Brighton, BN1 3XE

Write a reply...
Reply
Hide
Reputation gems: You get these gems as you gain rep from other members for making good contributions and giving helpful advice.