Nope, that’s not quite it, because if somebody puts $10 in the bank, it creates $10 of assets (cash or reserves) and $10 of liabilities (deposits) so it doesn’t give the bank anything they can do anything with, apart from liquidity.

The only way it can work is if writing a mortgage creates an asset (the loan), and then a new liability is made to match it (a deposit of the same amount).

The security is 100% the bank’s capital, since any assets (cash/reserves) from deposits have matching liabilities.

The article I linked above from the UK’s central bank is confirming that all modem banks work the way I am saying.

When someone puts $10 in a bank, it most certainly gives the bank something they can do something with. In this case they can lend $9 out - assuming 10% reserve. On the balance sheet the bank then has $10 on the liability side - the deposit - and $9 loan and $1 reserve on the asset side. I think that you're confusing accounting with business.

Bizarrely, all the textbooks teach that that's how banking works, but it hasn't been true for decades.

It's characteristic of economics that it makes a song and dance about summing a geometric series while completely missing the point about how the system actually works.

What exactly isn't true in my statement?

- banks take in cash in from depositors (and other creditors)

- banks lend out cash to borrowers

- banks do not lend out all the cash that they've borrowed - they keep some in reserve

Do you have the name of any retail bank which does not operate according to this model? What does their balance sheet look like? The "textbooks" reference is not relevant here - my experience is from working in retail banking operations.

There is a academic paper here explaining how it works.

https://www.sciencedirect.com/science/article/pii/S105752191...

Essentially the bank can make the loan with a zero balance sheet.

If you work at the back end of a retail bank operation then you'll know that the loan department and the treasury department do not talk to each other about quantities. They talk to each other about price. Other than that the two operations operate in parallel. 'Funding' is just swapping the liabilities around in the market to try and reduce the amount the bank pays out in interest.

“I find it difficult to understand how this flow of funds analysis validates an assertion of general principle. What is described is a special case where a highly leveraged bank could find itself temporarily insolvent, with a very limited window of exposure before the bank would be found guilty of criminal fraud.”

https://www.cooperative-individualism.org/dodson-edward_revi...

I think the problem with what you're saying is the ambiguous use of the word 'cash'. Deposits, reserves, and physical currency are all 'cash' in some sense, but here it helps to be precise.

Banks don't 'lend out cash', they create deposits. Deposits are liabilities for banks. When a bank takes on a deposit, it also takes on a corresponding asset: either a loan in its books, or an increase in its reserve account.

In practice the reserve ratio is unimportant for a bank: in Canada and the UK the ratio is 0%. The real constraint on a banks ability to create money is it's leverage ratio, i.e. (assets - liabilities)/assets. In reality the formula is more complicated and uses risk weighting by asset class, but that's the crux of it.

That’s called the ‘money multiplier model’, it’s an incorrect model that doesn’t actually describe how any modern bank works. It’s basically a myth at this point.

I’m not confusing anything. Believe it or not, banks actually have to follow double entry accounting rules, and follow regulations about capital adequacy. Most countries don’t even have a reserve requirement, deposits generally don’t factor into lending at all.

It's been a long time since I did eco101, but I thought the multiplier was what made it possible for a bank to receive a $10 deposit and loan out $100.

The money multiplier has always been a simplified model that doesn’t actually explain how any modern real-world banks work.