Where does a bank get the money to lend ten times their deposits?

Answer 1

The "ten times" you refer to may refer to the percentage OF their deposits that banks may lend. I don't know what the actual number or formula is but, as I recall, it's about 90% - meaning they have to keep 10% of the total deposits they receive in cash and may invest the rest. So, you might have read that they lend out 10 times the amount of cash they have on hand. Whatever the amount, it's now set by strict regulation. The percentage is based on the experience of banks over many decades and takes in to considerations the ebb and flow of withdrawals. It's very predictable how much cash a bank will need on hand to meet that 'normal' flow of withdrawals. This leaves the rest available to invest (in the form of loans for houses, cars, business loans and the like) - which the bank has to do in order to earn a return so they can give their Depositor's a return. This explains why a "run on the bank" results in the bank failing. Here's how it works: 1) Let's say the bank has 15 depositors, each depositing $10,000. The bank now has $150,000. 2) In order to provide a return to those depositors, the bank takes 90% of the $150,000 ($135,000) and invests it - usually in the form of financing the purchase of a house, car or a loan to a business - leaving $15,000 in cash on hand. 3) Because of the law of large numbers tested over time, the bank knows that at any given time, only 15% of the total depositors (let's round that to two depositors for our example) will come in to withdraw funds and the average withdrawal will only be, say, $5,000. Meaning the bank will have cash demands for $10,000 with $15,000 in cash on hand to cover the withdrawals. 3) The bank, of course, is betting that they'll be able to earn a high enough interest rate from what they've charged to Borrowers that, after they absorb the losses from defaulting Borrowers and pay their overhead (salaries, building expenses, etc.), they'll have enough left over to make a profit. That's their business. ...which works well until, for some reason, their Depositors lose confidence. When that happens (as it did in the Great Depression), a much larger percentage of their Depositors 'run' to the bank to take their money out. The numbers look like this: 1) The bank is sitting with $135,000 of the Depositors' money loaned out and $15,000 of it in cash on hand to handle withdrawals and overhead. 2) Something cataclysmically rocks Depositors' confidence - the Stock Market falls, a war starts, etc. 3) The next morning, instead of two Depositors, twelve show up for their money. 4) The bank now needs to return $120,000 (12 Depositors x $10,000 each in deposits) 5) They only have $15,000 - total - on hand against the immediate demand for $120,000. (The bank doesn't have that much cash on hand because it went to pay for the business expansion, cars and houses the Borrowers borrowed it for.) 6) They close their doors and never re-open. Also called a "liquidity crisis," it's not dissimilar to the current problems banks are having now (but then, that wasn't your question). Fortunately, we have backup systems now to keep the banks open (think: "Reserve" as in "Federal Reserve"). A network of banks, the Federal Reserve and other systems kick in to get money to the banks that need it to meet those obligations and our banking system has not suffered the same kind of collapse since. Bottom Dollar Here is more information by AZDUDE: The information given in the answer above is accurate but not adequate. There existed a Central Bank a few years before Federal Reserve Bank came into existance. It was closed down by thoughtful leaders because of forseen reasons. The very reasons that lead to many other kinds of depressions after the Great Depression. Please research more to understand this or watch the documentaries Zeitgeist, The Movie and Zeitgeist: Addendum (Google for videos) while constantly trying to validate what is said in the movies. PS: Federal Reserve Bank avoided depressions like Great Depressions in USA. But it created lot worse conditions in many other countries for keeping the money stable and bussinesses profitable in USA. In this monetory system, someone has to suffer for other's comfort. ALSO: http://wiki.answers.com/Q/Where_does_the_bank_get_its_money_to_lend

Answer 2

The sources of funds for banks are as follows:

1. Take money from the capital investment on the bank
2. Take money from the money deposited into their accounts by customers
3. Borrow money from other banks
4. Borrow money from the central bank of the country

Answer 3

There is no money involved. Money has intrinsic value like gold or silver, or is some kind of script that may be exchanged for a set amount of something that has intrinsic value and is physically held in a vault somewhere. Currency on the other hand, is largely backed by debt. If you owe me a hundred dollars my demand note is considered an asset. This is the form of assets that currency, such as our federal reserve notes are backed by.

When a bank loans someone a hundred dollars it is required by the group of privately owned central banks known as the Federal Reserve Bank to hold the value of ten percent of that loan in its reserves. The ten dollars it must hold in its reserves can be a number of different types of assets. But in all probability its assets represent debt owed to the bank: either cash or a number of different types of financial instruments.

The hundred dollars it loans out is just generated out of nothing. It is just a number added to an account that a check can be written against or that can be withdrawn in cash. It is not a part of a deposit that someone made. It is not that someone deposited a hundred dollars and the bank held ten and loaned out ninety. It is that the bank held ten dollars and made up a hundred out of nothing.

The Federal Reserve pays the banks interest on the reserves they hold.

They simply print the dollars to do this.