Comment by fauigerzigerk
16 days ago
>Sounds like a similar mechanism as the UK. I'm not aware if the system is exactly the same or not.
Yes, this mechanism is called fractional reserve banking. It's in use basically everywhere.
16 days ago
>Sounds like a similar mechanism as the UK. I'm not aware if the system is exactly the same or not.
Yes, this mechanism is called fractional reserve banking. It's in use basically everywhere.
Interestingly that paper from the Bank of England makes no mention of "fractional reserve" anywhere, but they do say:
>Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach
>While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates.
>In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available
Anyway, I think I'm digressing from the topic a bit here - but I _think_ what I've learned recently is that in the UK it isn't actually fractional reserve banking, which I was surprised by.
>but I _think_ what I've learned recently is that in the UK it isn't actually fractional reserve banking, which I was surprised by.
The BoE doesn't currently impose a mandatory reserve requirement. They do have more general liquidity requirements though (central bank reserves being one possible source of liquidity). I would still see it as a fractional reserve banking system, especially as these minor differences don't matter for the question of how money is created.
Yeah I think that's a fair shout, the main element being that private banks create the money via loans. Thanks for engaging, I appreciate the discussion. One day I might grok how modern economies hang together, but I've a way to go yet.