Posted: Dec 12, 2016 10:20 pm
newolder wrote:American banks only have to back up investments (or loans) with a cash reserve ratio of 10%. This means with an American savings account for 10,000 dollar, the banks can invest an additional 90,000 dollar.
For which we should be grateful that you are not running a bank, I guess.
US savings with a reserve of 10% means banks can lend out 90 cents on each dollar.
$10k savings lets them lend $9k not $90k.
Just on this point, a 10% fractional reserve DOES allow the banking system to lend up to 9 times the initial savings.
Let's say a new deposit of $10k is made at a bank. That bank can lend out another $9k, i.e. the initial depoist less a 10% reserve. If this were deposited in another bank, that bank could lend $8.1k (90% of $9k). If that $8.1k is deposited at a third bank, that can then be lent on again, less the 10% reserve. Continue this cycle ad infinitum.
Theoretically therefore, for every new deposit of $X, the banking system can create $X/y of new money, where y is the fractional reserve percentage. So $10,000 initially deposited becomes $10,000/0.10 = $100,000 of new money, i.e. $90,000 of new money created out of nothing. It's known as the money multiplier and is a well known phenomenon in economics.