Re:Counterfeiting Stock – Explaining illegal naked shorting ...
by kgwgk on Monday February 01, 2021 @12:38PM
(#25990952)
If a bank is created and you deposit $1, the bank has $1.
They can lend only $0.9 because they need to keep $0.1 as reserve (for example).
From there different things could happen:
a) if the borrower takes the $0.9 and takes it elsewhere the bank cannot lend a single additional cent until they get more deposits.
The fractional reserve means they could only lend a fraction of the dollar.
Maybe the money will be deposited in another bank who will then lend to someone else, but for the original bank who got $1 it stops there.
b) if that money remains in the bank as a new deposit, they have now $1.9 in deposits.
They can lend a fraction of the additional $0.90, and make an additional loan of $0.81 (keeping $0.19 in reserves in total).
If the second loan also ends in the bank as a deposit they will have $2.71 in deposits, they can make a new loan etc. but the multiplier is limited.
For shares there is no limit at all.
If Alice has a share she can lend it to Bob who sells it to Carol. Carol can lend it to Daniel who sells it to Elaine. Elaine can lend it to Felix who sells it to Gloria. Gloria can lend it to Hector who sells it to Ingrid. They can go on for as long as they want and all the ladies will be long one share.
They can lend only $0.9 because they need to keep $0.1 as reserve (for example).
From there different things could happen:
a) if the borrower takes the $0.9 and takes it elsewhere the bank cannot lend a single additional cent until they get more deposits.
The fractional reserve means they could only lend a fraction of the dollar.
Maybe the money will be deposited in another bank who will then lend to someone else, but for the original bank who got $1 it stops there.
b) if that money remains in the bank as a new deposit, they have now $1.9 in deposits.
They can lend a fraction of the additional $0.90, and make an additional loan of $0.81 (keeping $0.19 in reserves in total).
If the second loan also ends in the bank as a deposit they will have $2.71 in deposits, they can make a new loan etc. but the multiplier is limited.
For shares there is no limit at all.
If Alice has a share she can lend it to Bob who sells it to Carol. Carol can lend it to Daniel who sells it to Elaine. Elaine can lend it to Felix who sells it to Gloria. Gloria can lend it to Hector who sells it to Ingrid. They can go on for as long as they want and all the ladies will be long one share.