Posted: Feb 21, 2014 6:37 pm
by UndercoverElephant
Panderos wrote:Personally I suspect the video is wrong and the banks have to borrow from the Central Bank in order to do this.

Nope. Under a fractional reserve system the bank borrows £10 from the Central Bank and it can then lend out £90 in loans. But in the UK, we don't even have a fractional reserve system anymore. It's voluntary. The bank can in fact lend out however much money it wants, just by creating it.

But this still raises the question, if banks can borrow from a central bank why do they need depositors?

Because they can use the money deposited to invest and make even more money. Banks can create money out of thin air for loaning to people, but if they want to do anything else with money then they either have to borrow it from the central bank or, preferably, get it from depositors.