<p>I think there are a few separate issues here.</p>
<p><strong>First, semantics: if an institute doesn't let you deposit money into your account, I think we'd be hard-pressed to call it a &quot;bank&quot;.</strong></p>
<p>This really doesn't matter to the fundamental aspect of your question, but I think it's of some use. Because a &quot;bank&quot; <em>has</em> to allow deposits (at least by a naive definition, if not a legal one), you're artificially limiting yourself to institutes that do so.</p>
<p>If we broaden the scope of the question to include more than just &quot;banks&quot;, we start to get to the meat of the problem.</p>
<p><strong>Second, the real question: why would an institute let you deposit money into their possession to begin with?</strong></p>
<p>I'm sure a hundred super-smart, very educated experts on the subject will give you a hundred and five different answers that are all the absolute, only truth in all the universe.</p>
<p>But the gist of it is that people are willing to pay the bank to safeguard their money. Money in the bank is insured against theft and heavily guarded, so many people would rather have large sums of money in the bank than in their house.</p>
<p>In return, they might pay for the service directly or through microtransactions related to the account. Many banks charge fees for various things, such as cashier's checks, notary services, or financial advice, services you might not bother with if you aren't already in possession of a checking account.</p>
<p>Further, banks can take the money in your checking account and invest it elsewhere (an obvious form of investment being loans to other people). A single, smart person investing a thousand people's money can make enough profit to be worth their while without being directly paid a cent. Scale that up and you get large banking corporations.</p>
<p>Banks often make money off credit card transactions, even if you make payments before any direct interest is due. They also make money off overdraft fees (a form of lending with very high &quot;interest&quot; rates), interest on the credit card (more lending), and so forth.</p>
<p>And, of course, they hope that if you need to borrow money, you'll do it through them.</p>
<p><strong>Third, the side question: do institutes need deposits to make money off loans?</strong></p>
<p>No, they absolutely do not.</p>
<p>Payday loan establishments don't take deposits, instead relying on high-interest, low payback period lending to make their money.</p>
<p>Pawning an item is a form of payday loan with physical collateral: you leave the collateral with the pawn shop and get paid for it, then if you return on time you get most of your money back, with the difference being the shop's fee for the loan. Pawn shops make a lot of money through simply buying low and selling high, but they still make money off pawned items and don't take deposits.</p>
<p>That said, you can only lend money if you have it, so having a large amount of cash sitting in your vault from deposits allows you to lend more money than if you only lend from your own finances. There's more risk involved, but when you start getting thousands and millions of account holders, the aggregate risk goes way down and you can start treating random statistical values like static rates.</p>
<p>Because bank deposits allow the bank to loan more money, it raises the interest they earn on the loans, so it's a good incentive to allow people to deposit into bank accounts.</p>
<p><strong>Fourth, the question not asked: what does the quoted article mean?</strong></p>
<p>I'm not an expert here, but from my reading it's basically just a way of twisting around the semantics to describe how things can be treated in an opposite fashion to common convention, but doesn't actually prove the convention wrong.</p>
<p>The article claims that lending money &quot;creates&quot; that money. This is true to a degree, but is meaningless in the big picture. When a modern bank gives you a loan, they don't actually hand you any physical thing that's worth money. They just write a number on a (probably digital) ledger that says you &quot;have money&quot;.</p>
<p>But they can only get away with that because they own assets that are worth real-world value equivalent to the amount they've &quot;created&quot;, and because, in the long run, you will give them the amount of money they've lent you, balancing the sheet yourself.</p>
<p>A bank can only get away with &quot;creating&quot; money for a borrower if they can afford to transfer that money to whomever the borrower is trying to buy something from. It does no good to have fictional money if you can't actually spend it, and you can't spend it if the bank doesn't have a commodity the seller's bank wants.</p>
<p>In practice, the commodity transferred is often virtual money established by digital ledgers, but that commodity is very real, and very controlled, and therefore has actual, real-world value. As such, when a bank &quot;creates&quot; money out of thin air, it's doing so by spending a real-world commodity it only regains if you pay back your loan (or they sell your collateral after taking it back).</p>
<p>There's a particularly egregious bit of word-twisting the article makes. It claims:</p>
<blockquote>
<p>Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out. A related misconception is that banks can lend out their reserves. Reserves can only be lent between banks, since consumers do
not have access to reserves accounts at the Bank of England.</p>
</blockquote>
<p>It's true that reserves themselves can't be lent. That's the definition of the required reserve. But it's also irrelevant. Only 10-12½ % of deposits are required reserves (Bank of England, relevant to the article; other banking systems will have other reserve ratios). The other 87½-90 % of deposits are free to be lent out as desired to make money for the bank. Deposits are absolutely an asset for the bank to lend out in the normal sense of the word. They're <em>also</em> liabilities in a strict sense, but they're liabilities that earn the bank a lot of money.</p>
<p>Imagine you loan me £1000 of tools. I owe you either the tools, in good shape, or £1000, or some equivalent combination. Additionally, I'm probably paying you a fee, say £100 a month, to borrow them. Financially, that's a &quot;liability&quot;.</p>
<p>But I'm able to use those tools to earn £5000 a month doing something like construction or automotive repair. In normal speak, the tools are an enormous asset, not a liability. I just need to make sure I can return the tools and borrow other tools if you want yours back.</p>
<p>So while the text is &quot;true&quot;, it's also completely misguided in rebuking common &quot;misconceptions&quot;. In short, it's using smoke and mirrors to make you think you're wrong about something even though you really aren't.</p>
<p><strong>Summary</strong></p>
<p>Institutes don't <em>require</em> deposits to make money off lending, nor do they require lending to make money off deposits, but the two functions synergize very nicely with each other to create what we would typically think of as a bank.</p>
<p>The article you're quoting is mostly just using some hand-waving semantics to explain how modern banking uses a different mindset to approach the same thing we've been doing for millennia, with virtual currencies replacing physical bases for value.</p>
<p>But there's no epiphany behind the hand-waving; the fundamental nature of what's going on behind the layers of bureaucracy and pedantry hasn't changed since a caveman borrowed one sheep from his neighbor and gave back two sheep the next year.</p>
<p><strong>Note</strong></p>
<p>Most everything I've said is actually written in the quoted article. It talks about how a home loan that &quot;creates&quot; money is then balanced out by the bank paying the home seller's bank. It talks about gaining deposits so the bank can afford to lend more money. It talks about needing to pay interest to the central bank to maintain the assets upon which the commercial bank's finances are based.</p>
<p>The article isn't really bad or inaccurate. It just makes a few over-reaching, semantic claims that don't hold up under scrutiny in an attempt to make you think about banking a bit differently. And those are the claims that threw you off.</p>
<p>It also throws in the concept of growing the aggregate amount of money in the country (the &quot;broad money&quot;), a process typically called &quot;inflation&quot;, to maintain a stable, thriving economy. So in that sense, banks do &quot;create&quot; money (though ultimately the central bank does the creation by effectively forgiving tiny amounts of debt here and there through carefully-controlled interest rates as well as simply handing out newly-printed notes), but that's really an entirely different topic that's muddying the issue.</p>

CC BY-SA 4.0
2020-08-17T15:50:15.693Z
"I just need to make sure I can return the tools and borrow other tools if you want yours back." Since money is fungible, a bank can just borrow somebody else's money and give _that_ to you when you want your money; they don't have to take it out of whatever investment they've got it in. There's no concept of "your money"; only "the amount of money you have". (Source: _Paddington Abroad_, chapter 3.)
wizzwizz4
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2020-08-17T17:33:31.623Z
@wizzwizz4 what an excellent source, i see I have much paddington related study to do.
Segfault
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2020-08-18T17:49:35.277Z
@LawnmowerMan They put the loaned money in your bank account, no? That's a new deposit.
Criticize SE actions means ban
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2020-08-18T19:01:45.033Z
I generally think you are on the right track but there's a lot here that isn't really relevant to what seems to be the main question.  If the bank must hold some fraction of the amount it can, lend that answers the question of why the want deposits.  The problem with the article is that it suggests that this isn't a factor.  But clearly, if the government forces banks to hold reserves, it's a factor in how much reserves they hold and deposits directly relate to that.
JimmyJames
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2020-08-18T19:06:39.137Z
@LawnmowerMan I'm confused about your complaint.  The answer says: "Only 10-12½ % of deposits are required reserves."  How is that different from your assertion?
JimmyJames
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2020-08-18T20:24:55.813Z
@LawnmowerMan Yes. The creation of the loan creates an equal amount of deposits (leaving loans = deposits). Then, the deposits are transferred, along with an equal amount of assets, but that's not the part where the money is created.
Criticize SE actions means ban
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2020-08-19T00:19:54.353Z
"*Bank deposits are simply a record of how much the bank itself owes its customers.*" Utter nonsense. When I deposit \$1,000 in a bank, there is precisely what is described there, a record that the bank owes me \$1,000. But **the bank also has the \$1,000 that I deposited**, and can lend out most of it. They just ignore that.
David Schwartz
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2020-08-19T15:18:08.377Z
@DavidSchwartz "But the bank also has the $1000 that I deposited".  It's not clear what you mean here.  Are you talking about cash?  What do they 'have' exactly?  When I deposit a check into a bank account, there are records updated but what do they 'have'?
JimmyJames
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2020-08-19T15:29:42.330Z
@JimmyJames When you deposit a check into a bank account, there's a record that the bank owes you \$1,000. But the bank also has \$1,000 more that they can lend out -- the \$1,000 you deposited. The precise form of those funds has no relevance whatsoever. The bank can convert them into whatever form they need. Your bank can easily convert \$1,000 you deposited by check into cash if they need to. It makes no difference to your bank how you deposit that \$1,000 (unless it's a check drawn on that same bank, of course).
David Schwartz
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2020-08-19T15:45:42.397Z
@DavidSchwartz But they can (and do) lend far more than what they receive in deposits.  That's the whole point of this discussion.  Dollars are fungible so it's meaningless to talk about what deposit a loan was or wasn't taken from.  Interestingly enough, there is [no reserve requirement in the US right now](https://www.eidebailly.com/insights/articles/2020/4/federal-reserve-eliminates-reserve-requirements).
JimmyJames
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2020-08-19T15:48:51.320Z
@JimmyJames The claim is that bank deposits are "a liability of the bank, not an asset that could be lent out". That's false for precisely the reason I pointed out -- banks can lend out their deposits because there is an asset that matches that liability namely the deposit itself. What else banks can lend out doesn't change that. Reserve requirements were always pointless and dumb -- what's important is that the bank has *equity* in some form that can be used to cover its deposits, there's no reason that needs to be cash on hand since that can be borrowed if needed.
David Schwartz
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2020-08-19T16:39:27.640Z
@DavidSchwartz In standard double entry accounting, there's no 1-to-1 relationship between assets and liabilities.
JimmyJames
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2020-08-19T16:53:51.167Z
@JimmyJames I have no idea what your point is. Do you agree that when I deposit \$1,000 in a bank account, other than with a check drawn on that same bank, two things happen: 1) The bank owes me \$1,000. This is a liability for the bank. 2) The bank has \$1,000 (in some form). This is an asset for the bank. I'm not claiming this is some general accounting principle. It's just what happens when you deposit money in a bank.
David Schwartz
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2020-08-19T19:29:38.377Z
@DavidSchwartz You said that the deposit is more than just an entry in the liabilities owed to the account holder.  Sure there is a corresponding amount added to the banks assets but so are all the loans it makes.  In terms of what the bank actually records in association your account is just the liability.  There's no corresponding asset with your account number on it.  That's the way I understood what was in the answer.
JimmyJames
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2021-08-17T16:06:04.597Z
@DavidSchwartz The bank owes you \$1000 and someone else's bank owes them \$1000 less and some exchange of assets will occur from that bank to your bank. Might be reserves, or not...
Criticize SE actions means ban
CC BY-SA 4.0
2020-08-17T07:59:29.140Z
2020-08-17T08:05:21.513Z
2020-08-17T08:05:21.513Z
MichaelS
<p>This isn't the first time I've seen people claim that this Bank of England article says banks don't need to take deposits, but in fact the article actually says the opposite.
In order to make loans banks do need to take deposits or borrow money some other way:</p>
<blockquote>
<p>By attracting new deposits, the bank can
increase its lending without running down its reserves [...]. Alternatively, a bank can
borrow from other banks or attract other forms of liabilities, at
least temporarily. But whether through deposits or other
liabilities, <strong>the bank would need to make sure it was
attracting and retaining some kind of funds in order to keep
expanding lending.</strong></p>
</blockquote>
<p>(Emphasis in the original)</p>
<p>A bank may not strictly need to take deposits, but they do need to borrow money from somewhere and deposits are generally going to be the cheaper and more sustainable option.</p>
<hr />
<p>It's important to note that when the article talks about reserves, it's talking about central bank reserves, including in the quote above. Central bank reserves can't be lent out to customers, they are instead used to settle debts with other banks:</p>
<blockquote>
<p>[...] banks cannot directly lend out reserves. Reserves are an IOU
from the central bank to commercial banks. Those banks can
use them to make payments to each other, but they cannot
‘lend’ them on to consumers in the economy, who do not hold
reserves accounts.</p>
</blockquote>
<p>Reserves come into play when the money banks loan to people gets spent.  When that happens the the loaned money usually ends up moving from the borrower's account to some other person's account at another bank.  This results in the debt the bank used to owed to the borrower, in the form of a deposit the loan created at the bank, now being owed to the other bank.  These debts have to be quickly settled, as the other bank has its own debts that need to be settled.</p>
<p>In order to settle debts as a result of transactions like these, banks will use their central bank reserves as payment.  If a bank doesn't accept deposits then it will only be paying other banks and will need have reserves available equal (or close) to the amount of its unspent loan deposits. On the other hand, a bank that accepts deposits will also receive reserve payments from other banks offsetting its outgoing payments and reducing the reserves it needs to have available.</p>
<p>Now while central banks don't normally have an arbitrary limits on the amount central bank reserves a bank can obtain, banks don't have an unlimited supply of reserves.  Reserves are essentially deposits banks have at the central bank.  They can either obtain them by depositing their own money, or by borrowing from the central bank.  In order to obtain a loan central banks require collateral.  Banks don't have unlimited assets, and while they can collateralize their own loan assets, these have to be sufficiently good quality and their not a unlimited supply of quality loans either.</p>
<p>It's also important to remember that while the interest rates that banks have to pay on central bank loans is less than what they would have to pay for a loan from most other institutions, the central bank's rate is higher than the rate that banks typically pay on deposits.  To maximize profits a bank will want minimize the amount of reserves it has in preference for cheaper deposits.</p>
<hr />
<p>Part of the confusion I think is the people think that banks are creating their own money when giving out loans, when instead it's the borrower's money they're creating.  Banks don't directly make money for themselves by giving out loans.  As you said, and the article confirms, banks make their own money by lending out money at higher interest rate than they pay on deposits (and other liabilities):</p>
<blockquote>
<p>A bank’s business model relies on
receiving a higher interest rate on the loans (or other assets)
than the rate it pays out on its deposits (or other liabilities).</p>
</blockquote>
<hr />
<p>Ultimately, the point the article is trying to make is that quantitative easing (QE) increases the total amount of central bank reserves, but the total amount of central bank reserves doesn't affect the money supply.  Money supply instead primarily affected by the interest rate set on loans by the central bank.</p>
<blockquote>
<p>Monetary policy acts as the ultimate limit on money
creation. The Bank of England aims to make sure the
amount of money creation in the economy is consistent with
low and stable inflation. In normal times, the Bank of
England implements monetary policy by setting the interest
rate on central bank reserves. This then influences a range of
interest rates in the economy, including those on bank loans.</p>
<p>...</p>
<p>As a by-product of QE, new central bank reserves are
created. But these are not an important part of the
transmission mechanism. This article explains how, just as in
normal times, these reserves cannot be multiplied into more
loans and deposits and how these reserves do not represent
‘free money’ for banks.</p>
</blockquote>
<p>The article isn't trying to say fractional reserve banking is a myth, just that there's some misconceptions around it.  In particular, the article argues that changing the amount of central bank reserves doesn't change the money supply.</p>

CC BY-SA 4.0
2020-08-18T14:27:55.663Z
re "banks cannot directly lend out reserves" - the key word is "directly". As I understand it, the banks can exchange part of those reserves for BoE banknotes, and then lend those banknotes out (and conversely send stacks of used banknotes back to the BoE in exchange for being credited with additional reserves). Typically these transactions are decoupled for the customer too - the loan advance goes into your account, and the banknotes come out of the account as a separate transaction.
Steve
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2020-08-18T09:01:23.700Z
2020-08-18T09:01:23.700Z
Ross Ridge
<p>I think this perhaps <em>seems/reads</em> like a theoretical chicken-and-the-egg scenario, but IMO it's not really. The reality is just that fiat currency is like magic, and created out of nothing.</p>
<blockquote>
<p>Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits</p>
</blockquote>
<p>Central Banks print fiat currency. Pieces of paper that by law are given value, and/thus in turn society gives value to. That's what Central Banks do. Other Big-But-Not-Central Banks &quot;sell&quot; government bonds (that they acquire at &quot;auctions&quot; called <a href="https://en.wikipedia.org/wiki/Open_market_operation" rel="noreferrer">open market operations</a>) to this Central Bank and in turn get paid in these pieces of paper when and as they need them, i.e to satisfy withdrawals, etc.</p>
<p>With this in mind, to answer your questions:</p>
<blockquote>
<p>If banks do not need deposits to create loans, why do they take deposits? What motivates retail banks to allow retail customers to deposit their money if banks have no need for deposits to make loans?</p>
</blockquote>
<p>I suppose the answer is many-fold:</p>
<ol>
<li>Banks do not <em>need</em> deposits from customers to create loans, but they find that by offering those basic deposit services (most people'd rather not keep huge amounts of fiat money under their mattress), and taking those fiat paper deposits, it increases the amount of fiat they need to have on hand for bank operations, and reduces what they have to get from the Central Bank, via the above process.</li>
<li>Turns out that while offering deposit services to customers, banks found out they can also make some ancillary profits from other things, like charging fees, selling checkbooks, selling insurance (etc) and other services to those captive schmucks, err I mean &quot;valued customers&quot; that had to trust them with their fiat deposits.</li>
</ol>

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2020-08-19T19:17:30.667Z
I truly wonder how long the printing press economy will last.... not long is my guess
john doe
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2020-08-17T06:25:09.573Z
2020-08-17T06:44:24.790Z
2020-08-17T06:44:24.790Z
unknownprotocol
<p>Banking is confusing, and a lot of explanations apparently make things worse.</p>
<p>In this case, ignore whatever you read, and go back to first principles. By definition: balance sheets must balance. Assets have to be matched by liabilities or equity. However, one defining characteristic of banks is that they have a small percentage of their balance sheets as common equity. By implication, assets are mainly matched against liabilities (including some long-term subordinated instruments like preferred shares, which are considered part of “capital.”)</p>
<p>Deposits are a liability with a relatively low funding cost, and most retail deposits are “stickier” than funding from wholesale debt markets. (Retail investors might take part in a bank run, but the wholesale markets normally panic earlier.) That’s why banks want to keep them.</p>
<p>(There is also the issue of modern banks offering a wide range of financial products. They want to create captive customers for their entire business line.)</p>
<p>UPDATE: Note that if a bank did not accept deposits, it would be a levered non-bank financial intermediary. (Levered means that they are not a pass-through entity, like a mutual fund.) These entities exist. However, they have to follow different strategies than banks, with one key concern being the lack of deposits. (Lack of access to the central bank under normal conditions is another big issue.) So yes, it is entirely possible to act almost like a bank, and not take deposits.</p>

CC BY-SA 4.0
2020-08-16T20:18:34.187Z
This just dodges the question instead of answering it
Ezekiel
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2020-08-16T21:05:04.077Z
In what sense? Do you believe that banks are not interested in maximising profits?
Brian Romanchuk
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2020-08-16T18:28:55.940Z
2020-08-17T13:47:18.883Z
2020-08-17T13:47:18.883Z
Brian Romanchuk
<p>An individual bank needs deposits, other liabilities, and equity to fund loans so it will attract deposits using deposit attracting strategies.</p>
<p>Some loans are never taken out as currency. A vendor might be selling an investment or a consumption item to a borrower. In that case the lender creates an asset which is the borrower's debt. If the spending is instantaneous such as in an electronic payment then the asset which is the borrower's debt is created at the same time a deposit is made in a vendor's account.  The borrower and the vendor are both customers of the banking system (the set of all banks) even if they are customers of different banks. The banking system will then have more assets (borrower's debt) and more deposits and the two amounts increased simultaneously because no currency changed hands. Thus a new loan resulted in an increase in deposits.</p>
<p>Suppose a new loan is taken out as currency. When the loan is spent, the vendor of investment or consumption items will receive  income. The income will get deposited in the banking system unless the income earners' propensity to hold currency changed. There is no guarantee an individual bank will attract the deposit but the banking system as a whole will attract the deposit. The banking system will then have more assets (borrower's debt) and more deposits but it wasn't instantaneous because currency was used. Thus for the banking system as a whole, a new loan &quot;created&quot; after some delay, a new deposit.</p>
<p>You asked...</p>
<blockquote>
<p>The most pressing question I now have is: if banks do not need
deposits to create loans, why do they take deposits?</p>
</blockquote>
<p>Your quotes from the Bank of England do not indicate that &quot;banks do not need deposits to create loans&quot;. What it does say and that you quoted is &quot;bank lending creates deposits&quot;. There is no certainty an individual bank will attract those deposits but the banking system (the set of all banks) will.</p>

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2020-08-16T22:35:49.250Z
2021-09-05T04:05:37.853Z
2021-09-05T04:05:37.853Z
H2ONaCl
<p>I assume by &quot;banks&quot; you refer to retail banks.</p>
<p><strong>Retail banks take deposits by definition</strong>. If they didn't take deposits, they weren't retail banks. In other words, deposit-taking is a defining feature of retail banks.</p>
<p>Besides this fundamental point, banks are happy to take deposits, and this doesn't contradict the way the BoE describes how deposits (and more generally money) are created, namely by issuing loans.</p>
<p>What happens to deposits, once created via a new loan? It either stays with the bank, is withdrawn as currency, or it is transferred to an account at another bank. If the money is transferred, the bank has to transfer the same amount of reserve money (the money banks use for exchanges with each other via the central bank) to the other bank, because the deposit is a liability and has to be matched with an asset (the reserve money). If the sending bank had only outflows, it would quickly run out of reserves. At this point, the bank wouldn't be able to issue more loans. Not because of reserve requirements, but because it wouldn't be able to cover withdrawals or transfers of those loans to other banks. That limits how much profits the retail bank can make, other things equal.</p>
<p>So <strong>the retail bank is happy to take deposits</strong>, even if it weren't a defining feature. This is because taking deposits means it will also <em>receive</em> reserve money, via transfers from other banks, or cash deposits ( which can be exchanged for reserve money at the central bank). That way, the retail bank can maintain a larger balance sheet and make more profit, if funding costs (including the rate paid on deposits) are cheaper than interest charged on loans as is usually the case.</p>

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2021-08-17T14:14:59.117Z
2021-08-17T15:17:02.060Z
2021-08-17T15:17:02.060Z
BrsG
<p>Banks need deposits because they are actually trading in a particular property of money called 'liquidity'.</p>
<p>Money is a legally enforceable, transferable promise to pay the bearer something of real value at a later date. An IOU in essence. But promises differ depending on how quickly you can get hold of that value. Cash, you can spend right now. A contract promising to repay so much a month over the next 20 years has a high value, but it will take you 20 years to get hold of it. The sooner you can spend money, the more 'liquid' it is. What banks do is to swap high-liquidity for low-liquidity forms of money.</p>
<p>When people deposit money in the bank, they put in high-liquidity cash, and get back a low-liquidity promise from the bank to repay it on demand.</p>
<p>When people borrow from the bank, they put in a low-liquidity promise to repay on a fixed schedule, and get back high-liquidity credit, using the deposits to imbue the credit with liquidity.</p>
<p>Fractional reserve banking relies on the fact that usually only a fraction of the money is being spent at any given moment in time. As long as only a fraction of it is needed immediately at any given instant, the cash deposits can cover it, and the credit can thus be spent immediately, like cash. It's not precisely as liquid as cash is because there's always a chance of too much being spent at once. You have a high probability of being able to spend it now, but not certainty. But so long as there are enough liquid deposits in the bank, the probability is high.</p>
<p>The bank is not at risk of running out of money because of this, it has a vault full of loan agreements promising to repay loans with a value sufficient to cover it all. But the value in these loan agreements might take 20 years to access. However, it can run out of liquidity if too many depositors ask for their money back. It may then find it has to sell some of those loan agreements to another bank in exchange for cash, which will generally be for less than their face value. The faster you need it, the lower the value of non-liquid money is.</p>
<p>One of the unexpected implications of this viewpoint is that banks don't actually create money, borrowers do. By promising to repay the loan, the loan agreement you sign is turned into new money. The bank is only trading in liquidity, transferring it from one set of customers to another.</p>

CC BY-SA 4.0
2020-08-19T21:01:56.520Z
2020-08-19T21:01:56.520Z
Nullius in Verba
<p>Banks like taking deposits because they can usually pay sub market interest rates on them, hence they can make a profit.  For example , if Fed Funds =2pct they might pay 1.5pct on deposits whilst investing the money at 2pct or greater.  Things get complicated when Fed Funds gets close to zero (like now).  Big banks generally pay close to zero on deposits right now but they can’t earn much with the money either.</p>

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2020-08-17T02:09:28.650Z
Yes, but why do banks want the deposits in the first place? Having deposits means that the bank has to pay interest to the depositors (even if the rates are "sub market interest rates"). If banks do not need deposits to make loans, why do they take deposits?
Flux
CC BY-SA 4.0
2020-08-17T09:40:04.650Z
@Flux the answer says: because they make money on them. Borrowing money at low interest rates and lending it out at high interest rates makes money, does it not?
Criticize SE actions means ban
CC BY-SA 4.0
2020-08-17T09:45:53.947Z
@user253751 But what is the use of borrowing when they do not need to?
Flux
CC BY-SA 4.0
2020-08-17T10:16:56.077Z
@Flux so they can make extra money? Why does the cake shop also sell biscuits if it can already make money by selling cakes? Well, it makes *more* money if it sells biscuits too.
Criticize SE actions means ban
CC BY-SA 4.0
2020-08-17T21:40:51.080Z
@user253751 Here is what I think Flux is getting at: You referred to "Borrowing money at low interest rates and lending **it** out at high interest rates" -- the very wording presumes that the borrowing *enables* the lending, i.e., the money (**it**) that's lent wouldn't be available without having been borrowed first. But Flux's question is based on challenging precisely this presumption. If the bank can lend money at will, without having to borrow it from depositors, then the bank could make *more* money by lending and *not* borrowing. You may disagree, but this where Flux is coming from.
nanoman
CC BY-SA 4.0
2020-08-18T09:00:44.193Z
@Flux The bank can't lend more than X times its reserves. Borrowing money from depositors is one way it can get reserves. It's allowed to have other reserves as well but since it *can* get some reserves this way, why shouldn't it?
Criticize SE actions means ban
CC BY-SA 4.0
2020-08-18T20:11:26.947Z
@user253751 Yep, so you're disagreeing with the statement from the article that underlies Flux's question: "neither are reserves a binding constraint on lending".
nanoman
CC BY-SA 4.0
2020-08-17T01:38:43.347Z
2020-08-17T01:38:43.347Z
dm63
<p>I have read a lot about how commercial Banks create new money when they create loans. I found this be shocking and I would bet the vast, vast majority of people have no idea this is how it works.  97% of all currency in circulation comes from commercial bank loans.  That means 97% of or money is created as debt, let that sink in.</p>
<p>I had created a video on YouTube about this process and I am trying to get awareness.</p>
<p><a href="https://youtu.be/Q-3MEQnLbAk" rel="nofollow noreferrer">https://youtu.be/Q-3MEQnLbAk</a></p>
<p>I think the system is obfuscated on purpose because there's a lot of individuals who are benefiting from all this financialization of the monetary system.</p>
<p>Banks should not be fractional reserve banking but 100% reserve banking and that they should not be able to create new money, only the government should coin new money.</p>
<p>Banks used to be fractional reserve and they did not have to keep much, but in 2020 the reserve was set to zero. <a href="https://www.federalreserve.gov/monetarypolicy/reservereq.htm" rel="nofollow noreferrer">https://www.federalreserve.gov/monetarypolicy/reservereq.htm</a></p>
<p>Banks still need to adhere to the capital adequacy ratios but they have the person applying for a loan pay for that.</p>
<p>For example, a person gets a loan for <span class="math-container">$500,000 for a house. The banks creates the loan, which creates the $</span>500,000 in new money out of thin air. The bank ask the person for 20% down and then the banks has to keep 7% of that to cover the capital adequacy ratios and then they can use the rest to cover the ratio on other loans they make where they do not ask for a down payment.</p>
<p>This means you spend 15 years of your life paying back interest to a bank that created the money out of thin air with a few keystrokes.</p>
<p>As banks continue to make more and more loans it creates more and more inflation and you can see that by home prices more than doubling in the last few years.</p>
<p>When I had read the following quote for some reason it had stuck with me and I have pasted it on different comments sections and a lot of people it resonates with them.</p>
<p>&quot;If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless&quot;.</p>
<ul>
<li>Thomas Jefferson</li>
</ul>
<p>This may not be a real quote but it sure seems like what's happening.</p>
<p>Thanks again and keep up the amazing work!</p>
<p>Sincerely,
John Daniels</p>

CC BY-SA 4.0
2024-12-14T06:40:15.603Z
According the SE convention, the answer should be self-sufficient (not only referring the other source). The answer may express some author's impression of the problems, but judgment-based statements should be limited (i.e. it is not necessary claim that most people on earth have no clue of the problem). Besides, some text formatting tools are welcome, i.e. for quotes.
garej
CC BY-SA 4.0
2024-12-03T01:57:05.130Z
2024-12-03T01:57:05.130Z
John Daniels
<p><strong>What motivates retail banks to allow retail customers to deposit their money if banks have no need for deposits to make loans?</strong></p>
<p>As security. Some situation may arise that a lot many of the people might want to withdraw money. In that case, the bank might face shortage. They can take overnight loans from other banks or from the central bank however. More deposits too would help in this situation.</p>

CC BY-SA 4.0
2021-08-17T14:49:09.767Z
If the bank does not allow retail customers to deposit their money, there would be no one who needs to withdraw money.
Flux
CC BY-SA 4.0
2021-08-17T15:40:16.980Z
@Flux what if they run short of money to give loans?
Gary 2
CC BY-SA 4.0
2021-08-17T15:42:02.750Z
Money multiplier theory is ideal in nature.
Gary 2
CC BY-SA 4.0
2021-08-17T14:29:00.270Z
2021-08-17T14:29:00.270Z
Gary 2
<p>Banks do not &quot;take&quot; deposits. This would be the case only if the bank were operating as a storage warehouse for gold, silver, paper bank notes, and other forms of circulating money that customers want to be stored in bank vaults for safekeeping. Fractional reserve banks, by definition, issue bank notes and/or deposits as a multiple of whatever is counted as the currency on reserve in bank vaults, teller draws, and modern cash dispensing machines.</p>
<p>Why do banks issue deposits as a multiple of currency on reserve? The commercial customs, rules of law, and double-entry accounting scheme make it profitable to do so in the short run and government subsidies extend profits to the long run.</p>
<p>An individual bank holds a mix of loans, reserves, and securities on the asset side of the balance sheet. The bank issues liabilities and equity where assets must equal liabilities plus equity under the legal rules and methods of double-entry accounting. Transaction deposits are liabilities of banks which non-banks use to make customary payments, so the loan is an increase of bank assets and transaction deposits are the increase of liabilities in the bank system. Next each bank may have to send payment to another bank. This is a transfer of deposits on the liability side and reserves on the asset side in the accounting customs for clearing interbank payments. The only thing that happens when banks clear the check or an electronic payment authorization is an adjustment on the books of each bank is made and an adjustment on the records of the non-bank payor and payee is made to reflect the &quot;transfer&quot; of deposits, for non-banks, and of deposits and reserves, for banks.</p>
<p>If a bank cannot force a flow of reserves in its favor, via the issue of interest bearing deposits or shares that pay dividends, then it will be forced to sell securities out of its liquidity cushion, and then it will be forced to liquidate its loan portfolio, to keep making interbank payments. So the banking sector must increase the sum of deposit liabilities, money market borrowings, and equity to expand its portfolio of loans and securities. An efficient banking system can do this on a very tiny amount of reserves but eventually there is a shock in the wholesale money markets and a banking panic usually ensues. This is when some banks will be unable to rollover their deposits and other money market borrowings as these mature, and will be unable to issue new equity, because investors do not want to put risk money into a failing bank.</p>

CC BY-SA 4.0
2020-08-19T22:45:13.860Z
2020-08-19T22:45:13.860Z
SystemTheory
<blockquote>
<p>What motivates retail banks to allow retail customers to deposit their money if banks have no need for deposits to make loans?</p>
</blockquote>
<p>You can expect banks to be controlled by the bean counters. So if a bank accepts deposits, it is probably because it is profitable.</p>
<p>Banking can be divided into retail and wholesale. Many banks have both parts intermnally, some banks do only one part. Accepting deposits from the general public is part of the retail business. The retail works by buying money for a low cost and selling it a a higher price. Part of the cost for is the rent paid to the customer, part is other costs such as computer systems and wages and rents, and the cost of keeping reserves.</p>
<p>There can be situations where deposit rates are used as a part of a package of services, and where the customer as such is profitable regardless of certain products showing losses ( you see that at times at your grocery shop ) .</p>
<p>The retail business sells the money to wholesale businesses, possibly in the same bank. The wholesale as well buys at low cost and sells high. The wholesale will search to source at low interest rate and sell at high possibly through retail outlets.</p>
<p>The description above, simplified as it is, points to there beeing a wholesale price on money, distinct from the interest paid on deposits and distinct from the rent paid by lenders. As there are different &quot;kinds&quot; of lending, think secured property loans compared to unsecured high risk, there will be different &quot;markets&quot; with different prices.</p>
<p>The price of money is generally the interest rate paid. But this is not the full story, as you have to take inflation into account. In a situation with deflation, ie prices go down over time, the interest rate can be negative and still create profit. ( Note, the central bank is not in the business making profit, so the objektives are quite different ).</p>
<p>Now, over the centuries, there has been a multitude of shady companies trying to earn money in various ways. This is one of the reason why banking is extremely regulated. History has bank runs where the depositors lost trust in the banks and tried to remove all deposits at the same time.</p>

CC BY-SA 4.0
2020-08-17T05:55:52.903Z
2020-08-17T15:11:04.690Z
2020-08-17T15:11:04.690Z
ghellquist
<p>There are a number of roles deposits play in the banking system</p>
<p>Central bank as payments processor</p>
<p>The central bank facilitates payments between financial institutions.  When a business or individual at Bank A pays another business or individual with a bank account at Bank B, Bank A can not transfer the money to Bank B themselves.  It does not have the processes or systems to do this.</p>
<p>Instead the central bank transfers the money (records the change of balances between the two banks).  It does so by moving the equivalent of reserve money from Bank A to Bank B.  For this to work banks must keep sufficient reserve money at the central bank.  Since reserve money moves with deposits, it means that when a bank receives a deposit it also receives reserve money in its account with the central bank.</p>
<p>So if bank is concerned that it may not have sufficient reserve money to meet future outflows, it may try to attract deposits.  Remember that a bank creating loans and thereby deposits does not provide it with reserve money - new loans/deposits does not create reserves.  Only if it receives money from another bank (e.g. a customer payment or transaction) does it receive reserves from the other bank.</p>
<p>If it does not have sufficient reserves to meet outflows, it will have to borrow reserves either from other banks (via interbank market) or the central bank.  Not only can this be expensive (depending on the economic climate) but it may also signal that the bank is not managing  its liquidity well, a perception that banks want to avoid.</p>
<p>Loans creates deposits</p>
<p>Banks make a large part of its profits from generating loans.  The automatic consequence of creating a new loan is the creation of a new deposit in the borrowers name.  Therefore deposits in the banking system as a whole is inevitable.  Of course an individual bank could try to discourage deposits by only creating them for loans but try to discourage customers to open new bank accounts themselves.</p>
<p>However, given deposits have to exists in the banking system a bank that actively discouraged deposits would probably be viewed negatively by authorities and the public.</p>
<p>Investment opportunity</p>
<p>Incoming deposits (payments from other banks) brings with it an equivalent in reserve money.  Reserve money can be used to purchase securities either from the central bank or other financial institutions. Providing a bank can purchase securities that provides a better return than the interest rate they have to pay on deposits, it would be favorable to attract deposits.</p>
<p>In addition the securities can in turn be used as collateral for other types of business opportunities.  All in all deposits can, via reserve money, be used by the bank to generate investment returns in many different ways.</p>
<p>Regarding fractional reserve banking most central banks themselves have stated in the last 20 years that it is not a good or accurate explanation on how the banking system works. Even where a reserve requirements is applied by the central bank individual banks are still relatively unrestricted to create new loans in the short term.</p>

CC BY-SA 4.0
2023-02-15T23:39:31.290Z
2023-03-02T12:55:16.027Z
2023-03-02T12:55:16.027Z
Chris E
<p>I have taken some economics courses in university, where I was introduced to fractional-reserve banking. From my understanding, in fractional-reserve banking, the bank has motivation to encourage deposits from depositors, because a large part of these deposits can then be lent out as loans. A small part of the deposits have to be retained as &quot;reserves&quot; (hence the term &quot;fractional-reserve banking&quot;). The bank profits by earning more interest on the loans than it has to pay to the depositors.</p>
<p>However, I read several articles that contradict my understanding. In an article from the Quarterly Bulletin of the Bank of England - <a href="https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy" rel="noreferrer">Money creation in the modern economy</a>:</p>
<blockquote>
<p>The reality of how money is created today differs from the description found in some economics textbooks ... Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.</p>
<p>[...]</p>
<p>In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available.</p>
<p>[...]</p>
<p>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.</p>
</blockquote>
<p>In light of this, I am forced to re-evaluate my understanding of fractional-reserve banking. The most pressing question I now have is: if banks do not need deposits to create loans, why do they take deposits? What motivates retail banks to allow retail customers to deposit their money if banks have no need for deposits to make loans?</p>

CC BY-SA 4.0
2020-08-17T12:16:27.430Z
This is surely a result of the historically unprecedented low interest, which again is a result of the historically low, sometimes negative base interest rates? (Which are an attempt to stimulate investments which don't seem to be able to generate any surplus any longer?)
Peter - Reinstate Monica
CC BY-SA 4.0
2020-08-17T19:21:08.313Z
See also the closely related question on [Personal Finance](https://money.stackexchange.com/questions/75173/).
Tiercelet
CC BY-SA 4.0
2021-06-26T19:39:18.523Z
Investopedia: [Why Banks Don't Need Your Money to Make Loans](https://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp)
Flux
CC BY-SA 4.0
2023-08-25T06:04:08.560Z
Im pretty sure the answer is : they need deposits to make "more"  loans. And they want to make more loans because thats how they make a profit. If they dont attract deposits they are limited by reserves.  They can also use other methods to raise funds to lend out, but these other methods are going to be more expensive because the bank will be dealing with investors that expect a return. Deposits is usuallly going to be normal people who dont care about returns. Meaning its cheaper and more stable funding.
troy beckett
<banking><money-supply><central-banking><debt>
Why do banks take deposits if they do not need them to make loans?
Flux
# Why do banks take deposits if they do not need them to make loans?

(Asked by: username_0 on 2020-08-16)

I have taken some economics courses in university, where I was introduced to fractional-reserve banking. From my understanding, in fractional-reserve banking, the bank has motivation to encourage deposits from depositors, because a large part of these deposits can then be lent out as loans. A small part of the deposits have to be retained as "reserves" (hence the term "fractional-reserve banking"). The bank profits by earning more interest on the loans than it has to pay to the depositors.

However, I read several articles that contradict my understanding. In an article from the Quarterly Bulletin of the Bank of England - [Money creation in the modern economy](https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy):

> The reality of how money is created today differs from the description found in some economics textbooks ... Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
>
> [...]
>
> In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available.
>
> [...]
>
> 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.

In light of this, I am forced to re-evaluate my understanding of fractional-reserve banking. The most pressing question I now have is: if banks do not need deposits to create loans, why do they take deposits? What motivates retail banks to allow retail customers to deposit their money if banks have no need for deposits to make loans?

**Tags:** banking, money-supply, central-banking, debt
> **Comments:**
> **username_1**: This is surely a result of the historically unprecedented low interest, which again is a result of the historically low, sometimes negative base interest rates? (Which are an attempt to stimulate investments which don't seem to be able to generate any surplus any longer?)  
> **username_2**: See also the closely related question on [Personal Finance](https://money.stackexchange.com/questions/75173/).  
> **username_0**: Investopedia: [Why Banks Don't Need Your Money to Make Loans](https://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp)  
> **username_3**: Im pretty sure the answer is : they need deposits to make "more"  loans. And they want to make more loans because thats how they make a profit. If they dont attract deposits they are limited by reserves.  They can also use other methods to raise funds to lend out, but these other methods are going to be more expensive because the bank will be dealing with investors that expect a return. Deposits is usuallly going to be normal people who dont care about returns. Meaning its cheaper and more stable funding.  

---

## 13 answers

### Answer by username_4 on 2020-08-17. Score: 27

I think there are a few separate issues here.

**First, semantics: if an institute doesn't let you deposit money into your account, I think we'd be hard-pressed to call it a "bank".**

This really doesn't matter to the fundamental aspect of your question, but I think it's of some use. Because a "bank" *has* to allow deposits (at least by a naive definition, if not a legal one), you're artificially limiting yourself to institutes that do so.

If we broaden the scope of the question to include more than just "banks", we start to get to the meat of the problem.

**Second, the real question: why would an institute let you deposit money into their possession to begin with?**

I'm sure a hundred super-smart, very educated experts on the subject will give you a hundred and five different answers that are all the absolute, only truth in all the universe.

But the gist of it is that people are willing to pay the bank to safeguard their money. Money in the bank is insured against theft and heavily guarded, so many people would rather have large sums of money in the bank than in their house.

In return, they might pay for the service directly or through microtransactions related to the account. Many banks charge fees for various things, such as cashier's checks, notary services, or financial advice, services you might not bother with if you aren't already in possession of a checking account.

Further, banks can take the money in your checking account and invest it elsewhere (an obvious form of investment being loans to other people). A single, smart person investing a thousand people's money can make enough profit to be worth their while without being directly paid a cent. Scale that up and you get large banking corporations.

Banks often make money off credit card transactions, even if you make payments before any direct interest is due. They also make money off overdraft fees (a form of lending with very high "interest" rates), interest on the credit card (more lending), and so forth.

And, of course, they hope that if you need to borrow money, you'll do it through them.

**Third, the side question: do institutes need deposits to make money off loans?**

No, they absolutely do not.

Payday loan establishments don't take deposits, instead relying on high-interest, low payback period lending to make their money.

Pawning an item is a form of payday loan with physical collateral: you leave the collateral with the pawn shop and get paid for it, then if you return on time you get most of your money back, with the difference being the shop's fee for the loan. Pawn shops make a lot of money through simply buying low and selling high, but they still make money off pawned items and don't take deposits.

That said, you can only lend money if you have it, so having a large amount of cash sitting in your vault from deposits allows you to lend more money than if you only lend from your own finances. There's more risk involved, but when you start getting thousands and millions of account holders, the aggregate risk goes way down and you can start treating random statistical values like static rates.

Because bank deposits allow the bank to loan more money, it raises the interest they earn on the loans, so it's a good incentive to allow people to deposit into bank accounts.

**Fourth, the question not asked: what does the quoted article mean?**

I'm not an expert here, but from my reading it's basically just a way of twisting around the semantics to describe how things can be treated in an opposite fashion to common convention, but doesn't actually prove the convention wrong.

The article claims that lending money "creates" that money. This is true to a degree, but is meaningless in the big picture. When a modern bank gives you a loan, they don't actually hand you any physical thing that's worth money. They just write a number on a (probably digital) ledger that says you "have money".

But they can only get away with that because they own assets that are worth real-world value equivalent to the amount they've "created", and because, in the long run, you will give them the amount of money they've lent you, balancing the sheet yourself.

A bank can only get away with "creating" money for a borrower if they can afford to transfer that money to whomever the borrower is trying to buy something from. It does no good to have fictional money if you can't actually spend it, and you can't spend it if the bank doesn't have a commodity the seller's bank wants.

In practice, the commodity transferred is often virtual money established by digital ledgers, but that commodity is very real, and very controlled, and therefore has actual, real-world value. As such, when a bank "creates" money out of thin air, it's doing so by spending a real-world commodity it only regains if you pay back your loan (or they sell your collateral after taking it back).

There's a particularly egregious bit of word-twisting the article makes. It claims:

> Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out. A related misconception is that banks can lend out their reserves. Reserves can only be lent between banks, since consumers do
> not have access to reserves accounts at the Bank of England.

It's true that reserves themselves can't be lent. That's the definition of the required reserve. But it's also irrelevant. Only 10-12½ % of deposits are required reserves (Bank of England, relevant to the article; other banking systems will have other reserve ratios). The other 87½-90 % of deposits are free to be lent out as desired to make money for the bank. Deposits are absolutely an asset for the bank to lend out in the normal sense of the word. They're *also* liabilities in a strict sense, but they're liabilities that earn the bank a lot of money.

Imagine you loan me £1000 of tools. I owe you either the tools, in good shape, or £1000, or some equivalent combination. Additionally, I'm probably paying you a fee, say £100 a month, to borrow them. Financially, that's a "liability".

But I'm able to use those tools to earn £5000 a month doing something like construction or automotive repair. In normal speak, the tools are an enormous asset, not a liability. I just need to make sure I can return the tools and borrow other tools if you want yours back.

So while the text is "true", it's also completely misguided in rebuking common "misconceptions". In short, it's using smoke and mirrors to make you think you're wrong about something even though you really aren't.

**Summary**

Institutes don't *require* deposits to make money off lending, nor do they require lending to make money off deposits, but the two functions synergize very nicely with each other to create what we would typically think of as a bank.

The article you're quoting is mostly just using some hand-waving semantics to explain how modern banking uses a different mindset to approach the same thing we've been doing for millennia, with virtual currencies replacing physical bases for value.

But there's no epiphany behind the hand-waving; the fundamental nature of what's going on behind the layers of bureaucracy and pedantry hasn't changed since a caveman borrowed one sheep from his neighbor and gave back two sheep the next year.

**Note**

Most everything I've said is actually written in the quoted article. It talks about how a home loan that "creates" money is then balanced out by the bank paying the home seller's bank. It talks about gaining deposits so the bank can afford to lend more money. It talks about needing to pay interest to the central bank to maintain the assets upon which the commercial bank's finances are based.

The article isn't really bad or inaccurate. It just makes a few over-reaching, semantic claims that don't hold up under scrutiny in an attempt to make you think about banking a bit differently. And those are the claims that threw you off.

It also throws in the concept of growing the aggregate amount of money in the country (the "broad money"), a process typically called "inflation", to maintain a stable, thriving economy. So in that sense, banks do "create" money (though ultimately the central bank does the creation by effectively forgiving tiny amounts of debt here and there through carefully-controlled interest rates as well as simply handing out newly-printed notes), but that's really an entirely different topic that's muddying the issue.

> **Comments:**
> **username_5**: "I just need to make sure I can return the tools and borrow other tools if you want yours back." Since money is fungible, a bank can just borrow somebody else's money and give _that_ to you when you want your money; they don't have to take it out of whatever investment they've got it in. There's no concept of "your money"; only "the amount of money you have". (Source: _Paddington Abroad_, chapter 3.)  
> **username_6**: @wizzwizz4 what an excellent source, i see I have much paddington related study to do.  
> **username_7**: @LawnmowerMan They put the loaned money in your bank account, no? That's a new deposit.  
> **username_8**: I generally think you are on the right track but there's a lot here that isn't really relevant to what seems to be the main question.  If the bank must hold some fraction of the amount it can, lend that answers the question of why the want deposits.  The problem with the article is that it suggests that this isn't a factor.  But clearly, if the government forces banks to hold reserves, it's a factor in how much reserves they hold and deposits directly relate to that.  
> **username_8**: @LawnmowerMan I'm confused about your complaint.  The answer says: "Only 10-12½ % of deposits are required reserves."  How is that different from your assertion?  
> **username_7**: @LawnmowerMan Yes. The creation of the loan creates an equal amount of deposits (leaving loans = deposits). Then, the deposits are transferred, along with an equal amount of assets, but that's not the part where the money is created.  
> **username_9**: "*Bank deposits are simply a record of how much the bank itself owes its customers.*" Utter nonsense. When I deposit \$1,000 in a bank, there is precisely what is described there, a record that the bank owes me \$1,000. But **the bank also has the \$1,000 that I deposited**, and can lend out most of it. They just ignore that.  
> **username_8**: @DavidSchwartz "But the bank also has the $1000 that I deposited".  It's not clear what you mean here.  Are you talking about cash?  What do they 'have' exactly?  When I deposit a check into a bank account, there are records updated but what do they 'have'?  
> **username_9**: @JimmyJames When you deposit a check into a bank account, there's a record that the bank owes you \$1,000. But the bank also has \$1,000 more that they can lend out -- the \$1,000 you deposited. The precise form of those funds has no relevance whatsoever. The bank can convert them into whatever form they need. Your bank can easily convert \$1,000 you deposited by check into cash if they need to. It makes no difference to your bank how you deposit that \$1,000 (unless it's a check drawn on that same bank, of course).  
> **username_8**: @DavidSchwartz But they can (and do) lend far more than what they receive in deposits.  That's the whole point of this discussion.  Dollars are fungible so it's meaningless to talk about what deposit a loan was or wasn't taken from.  Interestingly enough, there is [no reserve requirement in the US right now](https://www.eidebailly.com/insights/articles/2020/4/federal-reserve-eliminates-reserve-requirements).  
> **username_9**: @JimmyJames The claim is that bank deposits are "a liability of the bank, not an asset that could be lent out". That's false for precisely the reason I pointed out -- banks can lend out their deposits because there is an asset that matches that liability namely the deposit itself. What else banks can lend out doesn't change that. Reserve requirements were always pointless and dumb -- what's important is that the bank has *equity* in some form that can be used to cover its deposits, there's no reason that needs to be cash on hand since that can be borrowed if needed.  
> **username_8**: @DavidSchwartz In standard double entry accounting, there's no 1-to-1 relationship between assets and liabilities.  
> **username_9**: @JimmyJames I have no idea what your point is. Do you agree that when I deposit \$1,000 in a bank account, other than with a check drawn on that same bank, two things happen: 1) The bank owes me \$1,000. This is a liability for the bank. 2) The bank has \$1,000 (in some form). This is an asset for the bank. I'm not claiming this is some general accounting principle. It's just what happens when you deposit money in a bank.  
> **username_8**: @DavidSchwartz You said that the deposit is more than just an entry in the liabilities owed to the account holder.  Sure there is a corresponding amount added to the banks assets but so are all the loans it makes.  In terms of what the bank actually records in association your account is just the liability.  There's no corresponding asset with your account number on it.  That's the way I understood what was in the answer.  
> **username_7**: @DavidSchwartz The bank owes you \$1000 and someone else's bank owes them \$1000 less and some exchange of assets will occur from that bank to your bank. Might be reserves, or not...  

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### Answer by username_10 on 2020-08-18. Score: 8

This isn't the first time I've seen people claim that this Bank of England article says banks don't need to take deposits, but in fact the article actually says the opposite.
In order to make loans banks do need to take deposits or borrow money some other way:

> By attracting new deposits, the bank can
> increase its lending without running down its reserves [...]. Alternatively, a bank can
> borrow from other banks or attract other forms of liabilities, at
> least temporarily. But whether through deposits or other
> liabilities, **the bank would need to make sure it was
> attracting and retaining some kind of funds in order to keep
> expanding lending.**

(Emphasis in the original)

A bank may not strictly need to take deposits, but they do need to borrow money from somewhere and deposits are generally going to be the cheaper and more sustainable option.

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It's important to note that when the article talks about reserves, it's talking about central bank reserves, including in the quote above. Central bank reserves can't be lent out to customers, they are instead used to settle debts with other banks:

> [...] banks cannot directly lend out reserves. Reserves are an IOU
> from the central bank to commercial banks. Those banks can
> use them to make payments to each other, but they cannot
> ‘lend’ them on to consumers in the economy, who do not hold
> reserves accounts.

Reserves come into play when the money banks loan to people gets spent. When that happens the the loaned money usually ends up moving from the borrower's account to some other person's account at another bank. This results in the debt the bank used to owed to the borrower, in the form of a deposit the loan created at the bank, now being owed to the other bank. These debts have to be quickly settled, as the other bank has its own debts that need to be settled.

In order to settle debts as a result of transactions like these, banks will use their central bank reserves as payment. If a bank doesn't accept deposits then it will only be paying other banks and will need have reserves available equal (or close) to the amount of its unspent loan deposits. On the other hand, a bank that accepts deposits will also receive reserve payments from other banks offsetting its outgoing payments and reducing the reserves it needs to have available.

Now while central banks don't normally have an arbitrary limits on the amount central bank reserves a bank can obtain, banks don't have an unlimited supply of reserves. Reserves are essentially deposits banks have at the central bank. They can either obtain them by depositing their own money, or by borrowing from the central bank. In order to obtain a loan central banks require collateral. Banks don't have unlimited assets, and while they can collateralize their own loan assets, these have to be sufficiently good quality and their not a unlimited supply of quality loans either.

It's also important to remember that while the interest rates that banks have to pay on central bank loans is less than what they would have to pay for a loan from most other institutions, the central bank's rate is higher than the rate that banks typically pay on deposits. To maximize profits a bank will want minimize the amount of reserves it has in preference for cheaper deposits.

---

Part of the confusion I think is the people think that banks are creating their own money when giving out loans, when instead it's the borrower's money they're creating. Banks don't directly make money for themselves by giving out loans. As you said, and the article confirms, banks make their own money by lending out money at higher interest rate than they pay on deposits (and other liabilities):

> A bank’s business model relies on
> receiving a higher interest rate on the loans (or other assets)
> than the rate it pays out on its deposits (or other liabilities).

---

Ultimately, the point the article is trying to make is that quantitative easing (QE) increases the total amount of central bank reserves, but the total amount of central bank reserves doesn't affect the money supply. Money supply instead primarily affected by the interest rate set on loans by the central bank.

> Monetary policy acts as the ultimate limit on money
> creation. The Bank of England aims to make sure the
> amount of money creation in the economy is consistent with
> low and stable inflation. In normal times, the Bank of
> England implements monetary policy by setting the interest
> rate on central bank reserves. This then influences a range of
> interest rates in the economy, including those on bank loans.
>
> ...
>
> As a by-product of QE, new central bank reserves are
> created. But these are not an important part of the
> transmission mechanism. This article explains how, just as in
> normal times, these reserves cannot be multiplied into more
> loans and deposits and how these reserves do not represent
> ‘free money’ for banks.

The article isn't trying to say fractional reserve banking is a myth, just that there's some misconceptions around it. In particular, the article argues that changing the amount of central bank reserves doesn't change the money supply.

> **Comments:**
> **username_11**: re "banks cannot directly lend out reserves" - the key word is "directly". As I understand it, the banks can exchange part of those reserves for BoE banknotes, and then lend those banknotes out (and conversely send stacks of used banknotes back to the BoE in exchange for being credited with additional reserves). Typically these transactions are decoupled for the customer too - the loan advance goes into your account, and the banknotes come out of the account as a separate transaction.  

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### Answer by username_12 on 2020-08-17. Score: 6

I think this perhaps *seems/reads* like a theoretical chicken-and-the-egg scenario, but IMO it's not really. The reality is just that fiat currency is like magic, and created out of nothing.

> Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits

Central Banks print fiat currency. Pieces of paper that by law are given value, and/thus in turn society gives value to. That's what Central Banks do. Other Big-But-Not-Central Banks "sell" government bonds (that they acquire at "auctions" called [open market operations](https://en.wikipedia.org/wiki/Open_market_operation)) to this Central Bank and in turn get paid in these pieces of paper when and as they need them, i.e to satisfy withdrawals, etc.

With this in mind, to answer your questions:

> If banks do not need deposits to create loans, why do they take deposits? What motivates retail banks to allow retail customers to deposit their money if banks have no need for deposits to make loans?

I suppose the answer is many-fold:

1. Banks do not *need* deposits from customers to create loans, but they find that by offering those basic deposit services (most people'd rather not keep huge amounts of fiat money under their mattress), and taking those fiat paper deposits, it increases the amount of fiat they need to have on hand for bank operations, and reduces what they have to get from the Central Bank, via the above process.
2. Turns out that while offering deposit services to customers, banks found out they can also make some ancillary profits from other things, like charging fees, selling checkbooks, selling insurance (etc) and other services to those captive schmucks, err I mean "valued customers" that had to trust them with their fiat deposits.

> **Comments:**
> **username_13**: I truly wonder how long the printing press economy will last.... not long is my guess  

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### Answer by username_14 on 2020-08-16. Score: 5

Banking is confusing, and a lot of explanations apparently make things worse.

In this case, ignore whatever you read, and go back to first principles. By definition: balance sheets must balance. Assets have to be matched by liabilities or equity. However, one defining characteristic of banks is that they have a small percentage of their balance sheets as common equity. By implication, assets are mainly matched against liabilities (including some long-term subordinated instruments like preferred shares, which are considered part of “capital.”)

Deposits are a liability with a relatively low funding cost, and most retail deposits are “stickier” than funding from wholesale debt markets. (Retail investors might take part in a bank run, but the wholesale markets normally panic earlier.) That’s why banks want to keep them.

(There is also the issue of modern banks offering a wide range of financial products. They want to create captive customers for their entire business line.)

UPDATE: Note that if a bank did not accept deposits, it would be a levered non-bank financial intermediary. (Levered means that they are not a pass-through entity, like a mutual fund.) These entities exist. However, they have to follow different strategies than banks, with one key concern being the lack of deposits. (Lack of access to the central bank under normal conditions is another big issue.) So yes, it is entirely possible to act almost like a bank, and not take deposits.

> **Comments:**
> **username_15**: This just dodges the question instead of answering it  
> **username_14**: In what sense? Do you believe that banks are not interested in maximising profits?  

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### Answer by username_16 on 2020-08-16. Score: 3

An individual bank needs deposits, other liabilities, and equity to fund loans so it will attract deposits using deposit attracting strategies.

Some loans are never taken out as currency. A vendor might be selling an investment or a consumption item to a borrower. In that case the lender creates an asset which is the borrower's debt. If the spending is instantaneous such as in an electronic payment then the asset which is the borrower's debt is created at the same time a deposit is made in a vendor's account. The borrower and the vendor are both customers of the banking system (the set of all banks) even if they are customers of different banks. The banking system will then have more assets (borrower's debt) and more deposits and the two amounts increased simultaneously because no currency changed hands. Thus a new loan resulted in an increase in deposits.

Suppose a new loan is taken out as currency. When the loan is spent, the vendor of investment or consumption items will receive income. The income will get deposited in the banking system unless the income earners' propensity to hold currency changed. There is no guarantee an individual bank will attract the deposit but the banking system as a whole will attract the deposit. The banking system will then have more assets (borrower's debt) and more deposits but it wasn't instantaneous because currency was used. Thus for the banking system as a whole, a new loan "created" after some delay, a new deposit.

You asked...

> The most pressing question I now have is: if banks do not need
> deposits to create loans, why do they take deposits?

Your quotes from the Bank of England do not indicate that "banks do not need deposits to create loans". What it does say and that you quoted is "bank lending creates deposits". There is no certainty an individual bank will attract those deposits but the banking system (the set of all banks) will.


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### Answer by username_17 on 2021-08-17. Score: 2

I assume by "banks" you refer to retail banks.

**Retail banks take deposits by definition**. If they didn't take deposits, they weren't retail banks. In other words, deposit-taking is a defining feature of retail banks.

Besides this fundamental point, banks are happy to take deposits, and this doesn't contradict the way the BoE describes how deposits (and more generally money) are created, namely by issuing loans.

What happens to deposits, once created via a new loan? It either stays with the bank, is withdrawn as currency, or it is transferred to an account at another bank. If the money is transferred, the bank has to transfer the same amount of reserve money (the money banks use for exchanges with each other via the central bank) to the other bank, because the deposit is a liability and has to be matched with an asset (the reserve money). If the sending bank had only outflows, it would quickly run out of reserves. At this point, the bank wouldn't be able to issue more loans. Not because of reserve requirements, but because it wouldn't be able to cover withdrawals or transfers of those loans to other banks. That limits how much profits the retail bank can make, other things equal.

So **the retail bank is happy to take deposits**, even if it weren't a defining feature. This is because taking deposits means it will also *receive* reserve money, via transfers from other banks, or cash deposits ( which can be exchanged for reserve money at the central bank). That way, the retail bank can maintain a larger balance sheet and make more profit, if funding costs (including the rate paid on deposits) are cheaper than interest charged on loans as is usually the case.


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### Answer by username_18 on 2020-08-19. Score: 0

Banks need deposits because they are actually trading in a particular property of money called 'liquidity'.

Money is a legally enforceable, transferable promise to pay the bearer something of real value at a later date. An IOU in essence. But promises differ depending on how quickly you can get hold of that value. Cash, you can spend right now. A contract promising to repay so much a month over the next 20 years has a high value, but it will take you 20 years to get hold of it. The sooner you can spend money, the more 'liquid' it is. What banks do is to swap high-liquidity for low-liquidity forms of money.

When people deposit money in the bank, they put in high-liquidity cash, and get back a low-liquidity promise from the bank to repay it on demand.

When people borrow from the bank, they put in a low-liquidity promise to repay on a fixed schedule, and get back high-liquidity credit, using the deposits to imbue the credit with liquidity.

Fractional reserve banking relies on the fact that usually only a fraction of the money is being spent at any given moment in time. As long as only a fraction of it is needed immediately at any given instant, the cash deposits can cover it, and the credit can thus be spent immediately, like cash. It's not precisely as liquid as cash is because there's always a chance of too much being spent at once. You have a high probability of being able to spend it now, but not certainty. But so long as there are enough liquid deposits in the bank, the probability is high.

The bank is not at risk of running out of money because of this, it has a vault full of loan agreements promising to repay loans with a value sufficient to cover it all. But the value in these loan agreements might take 20 years to access. However, it can run out of liquidity if too many depositors ask for their money back. It may then find it has to sell some of those loan agreements to another bank in exchange for cash, which will generally be for less than their face value. The faster you need it, the lower the value of non-liquid money is.

One of the unexpected implications of this viewpoint is that banks don't actually create money, borrowers do. By promising to repay the loan, the loan agreement you sign is turned into new money. The bank is only trading in liquidity, transferring it from one set of customers to another.


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### Answer by username_19 on 2020-08-17. Score: 0

Banks like taking deposits because they can usually pay sub market interest rates on them, hence they can make a profit. For example , if Fed Funds =2pct they might pay 1.5pct on deposits whilst investing the money at 2pct or greater. Things get complicated when Fed Funds gets close to zero (like now). Big banks generally pay close to zero on deposits right now but they can’t earn much with the money either.

> **Comments:**
> **username_0**: Yes, but why do banks want the deposits in the first place? Having deposits means that the bank has to pay interest to the depositors (even if the rates are "sub market interest rates"). If banks do not need deposits to make loans, why do they take deposits?  
> **username_7**: @Flux the answer says: because they make money on them. Borrowing money at low interest rates and lending it out at high interest rates makes money, does it not?  
> **username_0**: @user253751 But what is the use of borrowing when they do not need to?  
> **username_7**: @Flux so they can make extra money? Why does the cake shop also sell biscuits if it can already make money by selling cakes? Well, it makes *more* money if it sells biscuits too.  
> **username_20**: @user253751 Here is what I think Flux is getting at: You referred to "Borrowing money at low interest rates and lending **it** out at high interest rates" -- the very wording presumes that the borrowing *enables* the lending, i.e., the money (**it**) that's lent wouldn't be available without having been borrowed first. But Flux's question is based on challenging precisely this presumption. If the bank can lend money at will, without having to borrow it from depositors, then the bank could make *more* money by lending and *not* borrowing. You may disagree, but this where Flux is coming from.  
> **username_7**: @Flux The bank can't lend more than X times its reserves. Borrowing money from depositors is one way it can get reserves. It's allowed to have other reserves as well but since it *can* get some reserves this way, why shouldn't it?  
> **username_20**: @user253751 Yep, so you're disagreeing with the statement from the article that underlies Flux's question: "neither are reserves a binding constraint on lending".  

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### Answer by username_21 on 2024-12-03. Score: 0

I have read a lot about how commercial Banks create new money when they create loans. I found this be shocking and I would bet the vast, vast majority of people have no idea this is how it works. 97% of all currency in circulation comes from commercial bank loans. That means 97% of or money is created as debt, let that sink in.

I had created a video on YouTube about this process and I am trying to get awareness.

<https://youtu.be/Q-3MEQnLbAk>

I think the system is obfuscated on purpose because there's a lot of individuals who are benefiting from all this financialization of the monetary system.

Banks should not be fractional reserve banking but 100% reserve banking and that they should not be able to create new money, only the government should coin new money.

Banks used to be fractional reserve and they did not have to keep much, but in 2020 the reserve was set to zero. <https://www.federalreserve.gov/monetarypolicy/reservereq.htm>

Banks still need to adhere to the capital adequacy ratios but they have the person applying for a loan pay for that.

For example, a person gets a loan for $500,000 for a house. The banks creates the loan, which creates the $500,000 in new money out of thin air. The bank ask the person for 20% down and then the banks has to keep 7% of that to cover the capital adequacy ratios and then they can use the rest to cover the ratio on other loans they make where they do not ask for a down payment.

This means you spend 15 years of your life paying back interest to a bank that created the money out of thin air with a few keystrokes.

As banks continue to make more and more loans it creates more and more inflation and you can see that by home prices more than doubling in the last few years.

When I had read the following quote for some reason it had stuck with me and I have pasted it on different comments sections and a lot of people it resonates with them.

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless".

* Thomas Jefferson

This may not be a real quote but it sure seems like what's happening.

Thanks again and keep up the amazing work!

Sincerely,
John Daniels

> **Comments:**
> **username_22**: According the SE convention, the answer should be self-sufficient (not only referring the other source). The answer may express some author's impression of the problems, but judgment-based statements should be limited (i.e. it is not necessary claim that most people on earth have no clue of the problem). Besides, some text formatting tools are welcome, i.e. for quotes.  

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### Answer by username_23 on 2021-08-17. Score: 0

**What motivates retail banks to allow retail customers to deposit their money if banks have no need for deposits to make loans?**

As security. Some situation may arise that a lot many of the people might want to withdraw money. In that case, the bank might face shortage. They can take overnight loans from other banks or from the central bank however. More deposits too would help in this situation.

> **Comments:**
> **username_0**: If the bank does not allow retail customers to deposit their money, there would be no one who needs to withdraw money.  
> **username_23**: @Flux what if they run short of money to give loans?  
> **username_23**: Money multiplier theory is ideal in nature.  

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### Answer by username_24 on 2020-08-19. Score: 0

Banks do not "take" deposits. This would be the case only if the bank were operating as a storage warehouse for gold, silver, paper bank notes, and other forms of circulating money that customers want to be stored in bank vaults for safekeeping. Fractional reserve banks, by definition, issue bank notes and/or deposits as a multiple of whatever is counted as the currency on reserve in bank vaults, teller draws, and modern cash dispensing machines.

Why do banks issue deposits as a multiple of currency on reserve? The commercial customs, rules of law, and double-entry accounting scheme make it profitable to do so in the short run and government subsidies extend profits to the long run.

An individual bank holds a mix of loans, reserves, and securities on the asset side of the balance sheet. The bank issues liabilities and equity where assets must equal liabilities plus equity under the legal rules and methods of double-entry accounting. Transaction deposits are liabilities of banks which non-banks use to make customary payments, so the loan is an increase of bank assets and transaction deposits are the increase of liabilities in the bank system. Next each bank may have to send payment to another bank. This is a transfer of deposits on the liability side and reserves on the asset side in the accounting customs for clearing interbank payments. The only thing that happens when banks clear the check or an electronic payment authorization is an adjustment on the books of each bank is made and an adjustment on the records of the non-bank payor and payee is made to reflect the "transfer" of deposits, for non-banks, and of deposits and reserves, for banks.

If a bank cannot force a flow of reserves in its favor, via the issue of interest bearing deposits or shares that pay dividends, then it will be forced to sell securities out of its liquidity cushion, and then it will be forced to liquidate its loan portfolio, to keep making interbank payments. So the banking sector must increase the sum of deposit liabilities, money market borrowings, and equity to expand its portfolio of loans and securities. An efficient banking system can do this on a very tiny amount of reserves but eventually there is a shock in the wholesale money markets and a banking panic usually ensues. This is when some banks will be unable to rollover their deposits and other money market borrowings as these mature, and will be unable to issue new equity, because investors do not want to put risk money into a failing bank.


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### Answer by username_25 on 2020-08-17. Score: 0

> What motivates retail banks to allow retail customers to deposit their money if banks have no need for deposits to make loans?

You can expect banks to be controlled by the bean counters. So if a bank accepts deposits, it is probably because it is profitable.

Banking can be divided into retail and wholesale. Many banks have both parts intermnally, some banks do only one part. Accepting deposits from the general public is part of the retail business. The retail works by buying money for a low cost and selling it a a higher price. Part of the cost for is the rent paid to the customer, part is other costs such as computer systems and wages and rents, and the cost of keeping reserves.

There can be situations where deposit rates are used as a part of a package of services, and where the customer as such is profitable regardless of certain products showing losses ( you see that at times at your grocery shop ) .

The retail business sells the money to wholesale businesses, possibly in the same bank. The wholesale as well buys at low cost and sells high. The wholesale will search to source at low interest rate and sell at high possibly through retail outlets.

The description above, simplified as it is, points to there beeing a wholesale price on money, distinct from the interest paid on deposits and distinct from the rent paid by lenders. As there are different "kinds" of lending, think secured property loans compared to unsecured high risk, there will be different "markets" with different prices.

The price of money is generally the interest rate paid. But this is not the full story, as you have to take inflation into account. In a situation with deflation, ie prices go down over time, the interest rate can be negative and still create profit. ( Note, the central bank is not in the business making profit, so the objektives are quite different ).

Now, over the centuries, there has been a multitude of shady companies trying to earn money in various ways. This is one of the reason why banking is extremely regulated. History has bank runs where the depositors lost trust in the banks and tried to remove all deposits at the same time.


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### Answer by username_26 on 2023-02-15. Score: 0

There are a number of roles deposits play in the banking system

Central bank as payments processor

The central bank facilitates payments between financial institutions. When a business or individual at Bank A pays another business or individual with a bank account at Bank B, Bank A can not transfer the money to Bank B themselves. It does not have the processes or systems to do this.

Instead the central bank transfers the money (records the change of balances between the two banks). It does so by moving the equivalent of reserve money from Bank A to Bank B. For this to work banks must keep sufficient reserve money at the central bank. Since reserve money moves with deposits, it means that when a bank receives a deposit it also receives reserve money in its account with the central bank.

So if bank is concerned that it may not have sufficient reserve money to meet future outflows, it may try to attract deposits. Remember that a bank creating loans and thereby deposits does not provide it with reserve money - new loans/deposits does not create reserves. Only if it receives money from another bank (e.g. a customer payment or transaction) does it receive reserves from the other bank.

If it does not have sufficient reserves to meet outflows, it will have to borrow reserves either from other banks (via interbank market) or the central bank. Not only can this be expensive (depending on the economic climate) but it may also signal that the bank is not managing its liquidity well, a perception that banks want to avoid.

Loans creates deposits

Banks make a large part of its profits from generating loans. The automatic consequence of creating a new loan is the creation of a new deposit in the borrowers name. Therefore deposits in the banking system as a whole is inevitable. Of course an individual bank could try to discourage deposits by only creating them for loans but try to discourage customers to open new bank accounts themselves.

However, given deposits have to exists in the banking system a bank that actively discouraged deposits would probably be viewed negatively by authorities and the public.

Investment opportunity

Incoming deposits (payments from other banks) brings with it an equivalent in reserve money. Reserve money can be used to purchase securities either from the central bank or other financial institutions. Providing a bank can purchase securities that provides a better return than the interest rate they have to pay on deposits, it would be favorable to attract deposits.

In addition the securities can in turn be used as collateral for other types of business opportunities. All in all deposits can, via reserve money, be used by the bank to generate investment returns in many different ways.

Regarding fractional reserve banking most central banks themselves have stated in the last 20 years that it is not a good or accurate explanation on how the banking system works. Even where a reserve requirements is applied by the central bank individual banks are still relatively unrestricted to create new loans in the short term.


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