It's a little more than a technicality. It's to do with the order of processes.

Essentially there is nowhere in a modern bank where they go "if deposits <= 0 deny loan"

Yet I see that time and again in economic models that supposedly have banks in them.

Bank lending and the treasury backfill process that manages the equity buffer are parallel processes that are linked by price not quantity.

That means that banks will and can lend to any and all creditworthy customers they get prepared to pay the current price of money.

It's a dynamic system that can expand and shrink based upon the demand for credit.

I'm not sure what you mean by "modern bank" - when is the cut off date for you?

I can assure you that banks can and do end up in a position where they are unable to provide loans. Admittedly the process isn't "if deposits <= 0" because banks don't just access funds from depositors. A retail bank will typically have a blend of funding sources where deposit accounts make up 30-40% of the liabilities on the balance sheets. The rest of the funds are raised on money markets and through inter-bank lending or bond issuance.

A bank's balance sheet looks like: - Liabilities: deposit accounts, issued bonds, borrowings - Assets: loans, reserves, equity.

I can assure you that "if reserves < X" will mean that a bank is unable to offer a loan to a customer - credit worthy or not.

I experienced a banking crisis first hand in the country of my birth and this is exactly what happened. This is why banking crisis are damaging to the economy as a whole - even creditworthy customers and businesses are starved of funds.

What do you buy capital Bonds/ equity with?

Bank deposits. The more deposits there are the more demand there is for bank capital in aggregate.

The system reaches an equilibrium at a price not a quantity. The quantity floats as required by the price of money.

Reserves are always available since the other banks lend them out and the central bank as lender of last resort. They have no control function in quantity. Only in their price.

You can buy bonds with credit, and that is limited by risk, as you say.

That's why banks like deposits, they are cheap, and thus they can lend out cheaper.

So basically I deposit $1000.

Someone else goes to the bank and says ‘I want to borrow $1000’

Great the bank says, approved. And they set up a bank account for you that says you have $1000 in it.

Now they’ve got $1000 in reserves and 2 accounts that claim to have $1000 in it.

Now when you withdraw $500 where does that money come from? I can assure you it’s not from the banker’s wallet. That’s coming out of my deposit. Not from my account because my account still says they have $1000 on hold for me, it comes from the actual cash I deposited. (Which of course isn’t actually cash in most cases)

None of that matters in practice because unless everyone tries to withdraw all the money at once there’s plenty to cover all the withdrawals, but they are definitely using money from deposits to cover withdrawals.

I think part of the problem to understanding is that you’re assuming that banks are places that store money. They aren’t really, they are places that hold various types of assets and manage IOUs between themselves and other parties (other Banks, the Government/Fed, and customers etc.) in either direction.

Banks don’t really store money, you give them money and they give you bank credit, and then later on you exchange that credit back for money or transfer credit to someone at another bank and the two banks settle that with some asset (could be reserves etc.).

I think this is the main confusion, of course the physical cash the bank gives you for a withdraw might have been given to the bank during a deposit transaction, but in terms of the transactions on the balance sheet it did not come from there.

No, they say "I'm going to claim you can have $5000, because I can document that once I took in $1000 and I assert that I will take in $1000 again, perhaps many times".

Never mind $500, they don't even need to touch the $1000 you put in. They are just making it up as they go because they're a bank and can credibly assert that they will be handling capital in future.

They are using the FACT of having deposits to get the credibility to make up whatever loans they want. This is why leverage is like ten to one making the amount of capital in the world many times the assets of the world and everything in it.

When you withdraw $500 _they_just_make_it_up_.

You can't deposit a $1000 unless either a bank or the state created it first. Those greenbacks are just receipts for a deposit at the Fed created by prior government spending.

According to GP's linked article it's true when looking at the banking sector as a whole. For a single bank it seems like more of a technicality.

Also from the article:

> For example, if all of the deposits that a bank held were in the form of instant access accounts, such as current accounts, then the bank might run the risk of lots of these deposits being withdrawn in a short period of time. Because banks tend to lend for periods of many months or years, the bank may not be able to repay all of those deposits — it would face a great deal of liquidity risk.

Withdrawals go elsewhere and the central bank system then lends them back to the original source. In aggregate you just end up with a lot of label swapping. All that changes is the cost of the liabilities.

If I swap my labels wrong I can still go bankrupt though.