[pp.int.general] [Pp-leaders.discussion] EU: ESM-treaty

[Alexander Bock]

The reserve requirement is the amount of money a bank must hold in
cash or deposit at the central bank, calculated from the amount of
money its customers (which are in fact lenders) have deposited at the
bank. A Eurozone bank has to deposit 2% of what it has been given,
i.e. €20 of €1000. It has to work with the remaining €980. At no point
can a bank simply make up money, for example by depositing €1000 and
lending out €50000.

If you're interested in more on this topic, Wikipedia offers a fairly
good introduction. Though I suggest a simple secondary education book
on economics: I learned all of this a few years ago in grade 12 and
13.

Alex

2011/11/7 Yves Quemener <quemener.yves at free.fr>:
> On 11/07/2011 06:59 AM, Alexander Bock wrote:
>> Umm, I'm sorry but fractional reserve banking doesn't quite work like
>> that. If the reserve requirement were 10%, a bank that receives a
>> deposit of €1000 could lend out €900.
>
> From what I understand, the idea is that 10% (your mileage may vary) of
> the banks' "money" must be backed up with something tangible (which in
> itself is a weird notion : the idea that ownership is a tangible
> property). Therefore, a bank that provides 1000€ in an account must have
> at least 100€ of tangible valuables (gold or real estate for instance).
> Therefore, if a bank receives for 1000€ of gold, it can effectively
> raise the total amount in its accounts by 10,000€.
>
> In that respect, there is no real difference for a bank between
> receiving euros or lending euros on an account. I don't know what
> happens when 1000€ are transferred from bank A to bank B. I guess that
> bank B now has to buy 100€ of tangible goods, possibly from bank A which
> has now less obligations to keep. So what happens is that if bank B uses
> the totality of the 1000€ to buy tangible goods, it can effectively lend
> 10,000€ minus the 1000€ it still has to guarantee, so 9,000€. And
> indeed, banks borrowing from other banks in a circular way could
> indefinitely buy tangible goods. I guess that there are regulations to
> prevent that but given how badly designed the whole system now appears,
> I wouldn't be surprised to discover that even that is not true.
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