Re:Starting an Airline
by rayiner on Wednesday September 25, 2013 @09:24AM
(#6444388)
So from a bank's perspective, a loan is an asset and a deposit is a liability.
Say someone deposits $100 cash (federal reserve notes) into Bank A. Let's say the reserve ratio is 20%. It takes $80 and loans it to someone, who deposits in the same bank. It then takes $64 of that and loans it to someone who deposits in the same bank. It then takes $51 of that and loans it to someone who takes out cash and holds it.
The bank has the following assets: $20 + $16 + $13 in reserve, plus loans of $80 + $64 + $51 = $244.
It has the following liabilities: $100 + $80 + $64 = $244.
Now, if those loans don't get repaid, the bank might not remain solvent, but that has nothing to do with fractional reserve banking. Any entity that is solvent on the books can be rendered insolvent by loans going bad.
Say someone deposits $100 cash (federal reserve notes) into Bank A. Let's say the reserve ratio is 20%. It takes $80 and loans it to someone, who deposits in the same bank. It then takes $64 of that and loans it to someone who deposits in the same bank. It then takes $51 of that and loans it to someone who takes out cash and holds it.
The bank has the following assets: $20 + $16 + $13 in reserve, plus loans of $80 + $64 + $51 = $244.
It has the following liabilities: $100 + $80 + $64 = $244.
Now, if those loans don't get repaid, the bank might not remain solvent, but that has nothing to do with fractional reserve banking. Any entity that is solvent on the books can be rendered insolvent by loans going bad.