Banks can loan more out than they have in the bank but it's relative to how much they have in the bank they can loan out.
It's the central banks who "vouch" for this mechanism and is why banks are said to be able to "print" money out of no-where I guess.
https://en.wikipedia.org/wiki/Fractional-reserve_banking
The point about Fractional reserve banking is to allow banks to create debt which is another way to create money. (Debt is money)
This is actually what a lot of people are missing. It's not money thats being created per se but debt (credit) which is the same thing but just in put in a different context.
If you hold one dollar of a ten dollar deposit and loan out nine, reserves ARE less than their liabilities.
They still owe $10 plus interest to the depositor. They only have $1, on average. That's less than their liabilities. It doesn't say what you think it does.
"the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios"
The reserve requirement is a RESTRICTION on how much the bank can lend. Not a multiplier the bank can apply to deposits to print money.
If the Fed RAISED the reserve requirement, banks could not lend as much. If it completely removed the reserve requirement, banks could lend more.
That's my reading of your quote.
It's not "Money from the bank" but allowed debt creation backed by the central banks beyond
This is the important part of the quote which you left out.
"fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money"
Nothing in that talks about limiting it within their deposits. If that was the case then we wouldn't have had any issues at all since all banks did with the sub-prime crisis was creating debt without any actual "real money" being used as base for the loans.
If they raised the reserve requirement they could not lend out as much but still more than they have because again it's not actually money but debt. It's just that they now have much harder restrictions on the ratio.
Not a single dollar is moved from somewhere else in the bank to the lendee. It's literally just debt created.
Thats at least how I have understood it and maybe we are saying the same thing just focusing on different parts.
The point really is that banks do not actually move money they have to your account but instead create debt on your account without anything else is affected.
Not sure how else to think of it.
"The amount of reserves that a depository institution must hold against specified deposit liabilities."
http://www.federalreserve.gov/newsevents/reform_glossary.htm
And here's a table showing the exact percentages of DEPOSIT liabilities:
https://www.federalreserve.gov/monetarypolicy/reservereq.htm...
It doesn't get more definitive than that. And if it were a multiplier, how much can a bank lend out if they have less than $15 million in deposits? Infinity?
FRS is the act of central banks allowing banks to add money on accounts up to the ratio amount.
In other words. Banks can create money "out of the blue" since most money are just numbers and not actual cash.
Lending out money this way is not affecting any other accounts. No money is being taken from somewhere and put into the lendees account. Instead banks are allowed to create the loan which is debt, not to the bank but to the lendee. To the bank this is an asset to the lendee this is debt.
In other words the bank have more money after they give the loan not less.
It doesn't get much clearer hat than that IMO.
A simple statement on a Federal Reserve web site stating that such a bank has to keep deposits and that the loan comes from new money created should be sufficient.
I think you misunderstand the meaning of that quote. The money supply doesn't grow beyond the amount of underlying reserves because an individual bank lends out more than it has in deposits (and other funds). The multiplier is the result of this cascade: https://en.wikipedia.org/wiki/Fractional-reserve_banking#Exa...
It amazes me how many people get that backwards.
If a bank could loan more money than had on deposit, they could could simply loan themselves or other banks enough to pay off depositors. That is literally a license to print money. And the government prefers to keep that power for themselves. That's what the Federal Reserve is.
For every deposit of $10, they might earn 2% on the $9 they are allowed to lend out. They have to live on that 18 cents.
If they were able to loan out $90 or $100 (depending on what theory you hear), they'd make 10 times as much. Within a decade, they wouldn't need their deposits.
But banks do fail, so clearly that is not the case.
I think people are confusing modern banks with ancient banks that took in gold deposits and issued paper notes based on those deposits, sometimes issuing more notes than the gold they had on deposit. That is a completely different situation. And was not sustainable when it did occur.
The banking system is a huge creator of bubbles, but it does not work the way many imagine.
I asked one believer in the multiplier theory to show me the statute that says it works that way. He found the law that contradicted his belief and insisted it proved it.