<p>In order to understand this its important to understand how actually commercial banks contribute to money creation. It is true that commercial banks are part of money creating process but I think that you misunderstand the way in which they are part of it. When you go to commercial bank to get a loan commercial bank neither domestic or foreign is allowed to just create the money for that loan out of thin air. Only central bank can do that.</p>
<p>Rather the money creation process works in a way that central bank creates base money and in addition also allows commercial banks to borrow from it newly created reserves. Afterwards, the commercial banks help to multiply the base money due to fractional reserve system. For example, if fractional reserve requirement is <span class="math-container">$10\%$</span> that means that if a person deposits <span class="math-container">$\\\$100$</span> into the commercial bank they are allowed to lend out <span class="math-container">$\\\$90$</span> and keep <span class="math-container">$\\\$10$</span> as a reserve. Afterwards when the person who borrowed <span class="math-container">$\\\$90$</span> deposits them (or spends them and someone else deposits them), bank will again be allowed to keep only <span class="math-container">$\\\$9$</span> as reserve and lent out <span class="math-container">$\\\$81$</span>. In this way eventually up to <span class="math-container">$\\\$1000$</span> of new money can be created. This process is reversed once the loan is being paid back. The point is that commercial banks cannot simply create the money out of nothing so their domestic/foreign status does not matter that much.</p>
<p>Foreign commercial banks can make loans in dollars by simply first entering the forex market, buying some amount <span class="math-container">$X$</span> of dollars and then lending that amount to its customers. Alternatively foreign bank can also borrow dollars from other bank that has them and then lend them further.  When we talk about dollars in particular foreign banks have even access to federal funds market (see this <a href="https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/2017-economic-commentaries/ec-201707-the-federal-funds-market-since-the-financial-crisis" rel="nofollow noreferrer">Fed Cleveland</a> explainer) so they can borrow from there as well.</p>

CC BY-SA 4.0
2020-07-21T11:42:03.210Z
thanks! so you are basically saying that foreign banks cannot create directly USD loans in the way domestic US banks do. However foreign banks have access a liquid interbank USD loan markets, which in a way allows them to be a "proxy" of US banks. Finally a note on the alternative you propose to resort to FX markets. That would no be straightforward, because it creates currency risk for the lending Bank.
elemolotiv
CC BY-SA 4.0
2020-07-21T11:46:03.787Z
@elemolotiv essentially yes. Also the currency risk is passed down then to other people who then borrow those dollars from that foreign bank. Also currency risk is always involved in any international economic activity which is not within monetary union. Its not trivial but its not big deal too firms and banks can often hedge such risks.
1muflon1
CC BY-SA 4.0
2021-06-29T21:27:24.550Z
-1 for misleading explanation of the monetary system. See this for better explanation: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
Mick
CC BY-SA 4.0
2021-06-29T21:30:17.743Z
@Mick 1. I know the paper. 2. What is written above is fully consistent with what is written in that paper although simplified because for the purpose of the question more nuance is not necessary.
1muflon1
CC BY-SA 4.0
2021-06-29T21:35:47.490Z
The explanation you gave implies that there is an unbreakable ceiling on the money supply which is absolutely not the case in practice.
Mick
CC BY-SA 4.0
2021-06-29T21:39:42.487Z
@Mick of course there is under fractional reserve system. Say we go back before mandatory reserves were abolished. If reserve requirements is 10% then with 100 reserves maximum 1000 money can be created. That paper you linked just mentions that in practice (and this became practice only after 2008) central bank let private banks lend as much as possible and after the act it provides reserves. That does not mean that there is no hard cap on maximum money if CB would decide to screw private banks and not create reserves private banks would literally violate law.
1muflon1
CC BY-SA 4.0
2021-06-29T21:44:26.030Z
The paper mentions a way how single private bank can get more reserves form other private banks but a) that only works with system having excess reserves (that historically most of the time was not the case). B) a system as a whole still cannot create extra reserves without CB sanctioning. So ultimately there is a cap. Sure my answer here does not go into all these nuances, and discusses endogenous nature of money supply but I don’t think that’s necessary for the question here, and I don’t think anything above is misleading
1muflon1
CC BY-SA 4.0
2021-06-29T21:47:22.747Z
I agree that if there were a reserve requirement was 10 percent and if the CB refused to lend out extra reserves upon request then there would be a ceiling... but in the real world the reserve requirement in many countries is zero and CBs generally have policies of lending out extra reserves upon request. So the ceiling does not apply in the real world today.
Mick
CC BY-SA 4.0
2021-06-29T21:50:46.213Z
@Mick 1. even though *recently* central banks began to abolish reserve requirements, they still have capital requirements, and capital requirements are sort of individualized reserve requirements of each bank. 2. The point of my answer above is that central bank ultimately controls how much money there is in the economy. If central bank by its own volition decides that it wants as much money as possible then simply in the answer the maximum money would be infinity (that is actually a limit of max money supply as RR goes to zero) it does not change the fact that CB calls the shots
1muflon1
CC BY-SA 4.0
2021-06-30T00:12:40.820Z
I agree that CB ultimately determines total money in the system, but @Mick is right- the fractional reserve explanation is out of date, especially in this era of massive excess reserves.  The paper he links is a much better explanation.
dm63
CC BY-SA 4.0
2021-06-30T00:17:19.343Z
@dm63 1. The paper Mick linked does not denounce fractional reserves explanation but money multiplier **model** (do not confuse with this just with existence of some money multiplier). 2. That paper literally states that money multiplier *model* is still excellent way of introducing the subject to students, even though its not accurate (here I am introducing the concept to novice), so I literally follow suggestion of that paper.  3. Actually the paper itself is out of date now due to abandonment of fractional reserve system (the paper was actually about fractional reserve system)
1muflon1
CC BY-SA 4.0
2021-06-30T00:21:16.510Z
4. Also, whether money supply is exogenous (aka simple money multiplier model) vs endogenous (aka what that paper advocates), the answer to the question above is the same since its not even about domestic banks but about foreign banks. *In fact for foreign banks that have no direct access to CB reserves the exogenous money supply money multiplier model seems to be more appropriate a priori*
1muflon1
CC BY-SA 4.0
2021-06-30T00:26:59.117Z
Well it says : “While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality.”  Frankly, I’m not sure why something is useful if it is not accurate!
dm63
CC BY-SA 4.0
2021-06-30T00:30:00.287Z
@dm63 let me give you analogy: stating earth is round is not accurate as earth is oblate spheroid, but stating earth is round is more useful way to introduce concept of earth shape as you do not need to explain what oblate or spheroid means. The authors of that paper use bit strong language but money multiplier model is not completely wrong. It is not 100\% accurate, its close to the analogy of saying earth is round vs earth is oblate spheroid. Similarly Newtonian physics is not accurate, but useful way of introducing physics etc. Point is for *this Q* money multiplier model is accurate enough
1muflon1
CC BY-SA 4.0
2021-06-30T00:41:40.343Z
really, for this Q it is enough to show that the money supply is constrained by central bank somehow. That paper fully agrees that money supply is controlled by central bank. Its criticism of money multiplier is that it assumes banks are passive and thus money supply is fully exogenous whereas in reality there is endogeneity because there is feedback loop between banks and CB, but that does not mean that if CB decides to make only 100 reserves avaiable max M is 1000 (with RR 10%). Here due to endogeneity CB does not just set fixed amount of reserves but flexibly provides them to banks
1muflon1
CC BY-SA 4.0
2021-06-30T00:44:13.300Z
but again here we are talking about foreign banks, where that does not even hold as they do not necessarily have access to reserves at fed, so they in fact should work exactly as passive deposit intermediating institutions that just multiply deposits.
1muflon1
CC BY-SA 4.0
2021-06-30T00:46:29.173Z
Those analogies don’t seem inappropriate.  Eg the Earth is only about 0.2% away from being a perfect sphere , and Newtonian physics is good enough for nearly everything that isn’t traveling near the speed of light.  I personally don’t see the money multiplier model being as accurate as those analogies. Anyway we’re staying from the foreign bank topic of the OP
dm63
CC BY-SA 4.0
2021-06-30T00:53:14.727Z
@dm63 well money multiplier model gives very accurate predictions when there are no excess reserves, so actually Newtonian physics is perfect analogy because you can view money multiplier model as a special case of more nuanced model as Newtonian physics is special case of relativity.
1muflon1
CC BY-SA 4.0
2021-06-30T01:01:14.747Z
I am not sure how well versed you are in the monetary literature, but even endogenous money supply models (advocated by the paper <- even though the paper does not present rigorous model, its actually not proper paper but just bulleting targeted for more general audience), have M multiplier baked in them. The difference is that in endogenous M model private banks do not just passively intermediate and central bank does not just fix amount of reserve, but rather adjusts reserves according to money demand in economy where private banks transmit the info about it via their demand for res
1muflon1
CC BY-SA 4.0
2020-07-21T11:32:45.170Z
2020-07-21T11:32:45.170Z
1muflon1
<p>Banks are the primary lenders, who conjure almost all currency.</p>
<p>The 12 Member Banks of the Federal Reserve System only make loans in special circumstances.</p>
<p>The Swiss Bank is outside of the Federal Reserve System, in what is called the EuroDollar market. EuroDollars are USD's (they are not Euros) held by other non-US banks, as reserves or for currency exchange purposes.</p>
<p>I don't know the Swiss Bank, but I suspect they use these EuroDollars as reserves on their balance sheet, which they in turn use for currency creation in their own currency.</p>
<p>EuroDollar bank loans are also offered in USD's, but a Swiss Bank cannot conjure USDs directly. They would need to conjure Swiss Francs and exchange these francs for USDs.</p>
<p>Only US Chartered Banks who are part of the Federal Reserve System can conjure currency - and the Fed in certain circumstances.</p>
<p>&quot;Fractional reserve banking is the banking system used throughout the world today. Banks use fractional reserves to create loans for businesses and consumers.&quot;
(<a href="https://www.investopedia.com/terms/f/fractionalreservebanking.asp" rel="nofollow noreferrer">https://www.investopedia.com/terms/f/fractionalreservebanking.asp</a>)</p>
<p>12 Member banks of the Federal Reserve System only make loans (conjure currency) in a liquidity crisis. Otherwise, chartered banks are the primary place currency is conjured. Obviously, the 12 Member Banks and Federal Reserve Board set policy for targeting the currency supply size.
&quot;The Federal Reserve lends to banks and other depository institutions--so-called discount window lending--to address temporary problems they may have in obtaining funding.&quot; This is the repo market and QE.
(<a href="https://www.federalreserve.gov/faqs/banking_12841.htm" rel="nofollow noreferrer">https://www.federalreserve.gov/faqs/banking_12841.htm</a>)</p>
<p>&quot;This article explains how the majority of money in the modern economy is created by commercial banks making loans.</p>
<ol>
<li>Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.</li>
<li>The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.&quot;
(<a href="https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf" rel="nofollow noreferrer">https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf</a>)</li>
</ol>
<p>A Swiss bank operates as part of the Eurodollar market. This market is outside of the control of the federal reserve system.(<a href="https://corporatefinanceinstitute.com/resources/foreign-exchange/eurodollar/" rel="nofollow noreferrer">https://corporatefinanceinstitute.com/resources/foreign-exchange/eurodollar/</a>)</p>

CC BY-SA 4.0
2023-07-08T20:34:41.067Z
2023-07-08T20:37:13.907Z
2023-07-08T20:37:13.907Z
khay
<p>I understand, commercial banks are entitled by the Central Bank to &quot;create new money&quot; when they issue a loan and correspondingly &quot;destroy the money&quot; when the loan is paid back (with the constraints of the fractional reserve system). Correct?</p>
<p>If so, I wonder how a Swiss bank, which is entitled by the Swiss National Bank rather than the FED, can issue a new loan in USD. What is the mechanism?</p>
<p>thank you!</p>

<monetary-policy><money-supply><central-banking>
How can non-US banks issue USD loans?
elemolotiv
# How can non-US banks issue USD loans?

(Asked by: username_0 on 2020-07-21)

I understand, commercial banks are entitled by the Central Bank to "create new money" when they issue a loan and correspondingly "destroy the money" when the loan is paid back (with the constraints of the fractional reserve system). Correct?

If so, I wonder how a Swiss bank, which is entitled by the Swiss National Bank rather than the FED, can issue a new loan in USD. What is the mechanism?

thank you!

**Tags:** monetary-policy, money-supply, central-banking

---

## 2 answers

### Answer by username_1 on 2020-07-21. Score: 3

In order to understand this its important to understand how actually commercial banks contribute to money creation. It is true that commercial banks are part of money creating process but I think that you misunderstand the way in which they are part of it. When you go to commercial bank to get a loan commercial bank neither domestic or foreign is allowed to just create the money for that loan out of thin air. Only central bank can do that.

Rather the money creation process works in a way that central bank creates base money and in addition also allows commercial banks to borrow from it newly created reserves. Afterwards, the commercial banks help to multiply the base money due to fractional reserve system. For example, if fractional reserve requirement is $10\%$ that means that if a person deposits $\\\$100$ into the commercial bank they are allowed to lend out $\\\$90$ and keep $\\\$10$ as a reserve. Afterwards when the person who borrowed $\\\$90$ deposits them (or spends them and someone else deposits them), bank will again be allowed to keep only $\\\$9$ as reserve and lent out $\\\$81$. In this way eventually up to $\\\$1000$ of new money can be created. This process is reversed once the loan is being paid back. The point is that commercial banks cannot simply create the money out of nothing so their domestic/foreign status does not matter that much.

Foreign commercial banks can make loans in dollars by simply first entering the forex market, buying some amount $X$ of dollars and then lending that amount to its customers. Alternatively foreign bank can also borrow dollars from other bank that has them and then lend them further. When we talk about dollars in particular foreign banks have even access to federal funds market (see this [Fed Cleveland](https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/2017-economic-commentaries/ec-201707-the-federal-funds-market-since-the-financial-crisis) explainer) so they can borrow from there as well.

> **Comments:**
> **username_0**: thanks! so you are basically saying that foreign banks cannot create directly USD loans in the way domestic US banks do. However foreign banks have access a liquid interbank USD loan markets, which in a way allows them to be a "proxy" of US banks. Finally a note on the alternative you propose to resort to FX markets. That would no be straightforward, because it creates currency risk for the lending Bank.  
> **username_1**: @elemolotiv essentially yes. Also the currency risk is passed down then to other people who then borrow those dollars from that foreign bank. Also currency risk is always involved in any international economic activity which is not within monetary union. Its not trivial but its not big deal too firms and banks can often hedge such risks.  
> **username_2**: -1 for misleading explanation of the monetary system. See this for better explanation: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf  
> **username_1**: @Mick 1. I know the paper. 2. What is written above is fully consistent with what is written in that paper although simplified because for the purpose of the question more nuance is not necessary.  
> **username_2**: The explanation you gave implies that there is an unbreakable ceiling on the money supply which is absolutely not the case in practice.  
> **username_1**: @Mick of course there is under fractional reserve system. Say we go back before mandatory reserves were abolished. If reserve requirements is 10% then with 100 reserves maximum 1000 money can be created. That paper you linked just mentions that in practice (and this became practice only after 2008) central bank let private banks lend as much as possible and after the act it provides reserves. That does not mean that there is no hard cap on maximum money if CB would decide to screw private banks and not create reserves private banks would literally violate law.  
> **username_1**: The paper mentions a way how single private bank can get more reserves form other private banks but a) that only works with system having excess reserves (that historically most of the time was not the case). B) a system as a whole still cannot create extra reserves without CB sanctioning. So ultimately there is a cap. Sure my answer here does not go into all these nuances, and discusses endogenous nature of money supply but I don’t think that’s necessary for the question here, and I don’t think anything above is misleading  
> **username_2**: I agree that if there were a reserve requirement was 10 percent and if the CB refused to lend out extra reserves upon request then there would be a ceiling... but in the real world the reserve requirement in many countries is zero and CBs generally have policies of lending out extra reserves upon request. So the ceiling does not apply in the real world today.  
> **username_1**: @Mick 1. even though *recently* central banks began to abolish reserve requirements, they still have capital requirements, and capital requirements are sort of individualized reserve requirements of each bank. 2. The point of my answer above is that central bank ultimately controls how much money there is in the economy. If central bank by its own volition decides that it wants as much money as possible then simply in the answer the maximum money would be infinity (that is actually a limit of max money supply as RR goes to zero) it does not change the fact that CB calls the shots  
> **username_3**: I agree that CB ultimately determines total money in the system, but @Mick is right- the fractional reserve explanation is out of date, especially in this era of massive excess reserves.  The paper he links is a much better explanation.  
> **username_1**: @dm63 1. The paper Mick linked does not denounce fractional reserves explanation but money multiplier **model** (do not confuse with this just with existence of some money multiplier). 2. That paper literally states that money multiplier *model* is still excellent way of introducing the subject to students, even though its not accurate (here I am introducing the concept to novice), so I literally follow suggestion of that paper.  3. Actually the paper itself is out of date now due to abandonment of fractional reserve system (the paper was actually about fractional reserve system)  
> **username_1**: 4. Also, whether money supply is exogenous (aka simple money multiplier model) vs endogenous (aka what that paper advocates), the answer to the question above is the same since its not even about domestic banks but about foreign banks. *In fact for foreign banks that have no direct access to CB reserves the exogenous money supply money multiplier model seems to be more appropriate a priori*  
> **username_3**: Well it says : “While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality.”  Frankly, I’m not sure why something is useful if it is not accurate!  
> **username_1**: @dm63 let me give you analogy: stating earth is round is not accurate as earth is oblate spheroid, but stating earth is round is more useful way to introduce concept of earth shape as you do not need to explain what oblate or spheroid means. The authors of that paper use bit strong language but money multiplier model is not completely wrong. It is not 100\% accurate, its close to the analogy of saying earth is round vs earth is oblate spheroid. Similarly Newtonian physics is not accurate, but useful way of introducing physics etc. Point is for *this Q* money multiplier model is accurate enough  
> **username_1**: really, for this Q it is enough to show that the money supply is constrained by central bank somehow. That paper fully agrees that money supply is controlled by central bank. Its criticism of money multiplier is that it assumes banks are passive and thus money supply is fully exogenous whereas in reality there is endogeneity because there is feedback loop between banks and CB, but that does not mean that if CB decides to make only 100 reserves avaiable max M is 1000 (with RR 10%). Here due to endogeneity CB does not just set fixed amount of reserves but flexibly provides them to banks  
> **username_1**: but again here we are talking about foreign banks, where that does not even hold as they do not necessarily have access to reserves at fed, so they in fact should work exactly as passive deposit intermediating institutions that just multiply deposits.  
> **username_3**: Those analogies don’t seem inappropriate.  Eg the Earth is only about 0.2% away from being a perfect sphere , and Newtonian physics is good enough for nearly everything that isn’t traveling near the speed of light.  I personally don’t see the money multiplier model being as accurate as those analogies. Anyway we’re staying from the foreign bank topic of the OP  
> **username_1**: @dm63 well money multiplier model gives very accurate predictions when there are no excess reserves, so actually Newtonian physics is perfect analogy because you can view money multiplier model as a special case of more nuanced model as Newtonian physics is special case of relativity.  
> **username_1**: I am not sure how well versed you are in the monetary literature, but even endogenous money supply models (advocated by the paper <- even though the paper does not present rigorous model, its actually not proper paper but just bulleting targeted for more general audience), have M multiplier baked in them. The difference is that in endogenous M model private banks do not just passively intermediate and central bank does not just fix amount of reserve, but rather adjusts reserves according to money demand in economy where private banks transmit the info about it via their demand for res  

---

### Answer by username_4 on 2023-07-08. Score: 1

Banks are the primary lenders, who conjure almost all currency.

The 12 Member Banks of the Federal Reserve System only make loans in special circumstances.

The Swiss Bank is outside of the Federal Reserve System, in what is called the EuroDollar market. EuroDollars are USD's (they are not Euros) held by other non-US banks, as reserves or for currency exchange purposes.

I don't know the Swiss Bank, but I suspect they use these EuroDollars as reserves on their balance sheet, which they in turn use for currency creation in their own currency.

EuroDollar bank loans are also offered in USD's, but a Swiss Bank cannot conjure USDs directly. They would need to conjure Swiss Francs and exchange these francs for USDs.

Only US Chartered Banks who are part of the Federal Reserve System can conjure currency - and the Fed in certain circumstances.

"Fractional reserve banking is the banking system used throughout the world today. Banks use fractional reserves to create loans for businesses and consumers."
(<https://www.investopedia.com/terms/f/fractionalreservebanking.asp>)

12 Member banks of the Federal Reserve System only make loans (conjure currency) in a liquidity crisis. Otherwise, chartered banks are the primary place currency is conjured. Obviously, the 12 Member Banks and Federal Reserve Board set policy for targeting the currency supply size.
"The Federal Reserve lends to banks and other depository institutions--so-called discount window lending--to address temporary problems they may have in obtaining funding." This is the repo market and QE.
(<https://www.federalreserve.gov/faqs/banking_12841.htm>)

"This article explains how the majority of money in the modern economy is created by commercial banks making loans.

1. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
2. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’."
   (<https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf>)

A Swiss bank operates as part of the Eurodollar market. This market is outside of the control of the federal reserve system.(<https://corporatefinanceinstitute.com/resources/foreign-exchange/eurodollar/>)


---

