https://www.abc.net.au/news/20...
Both from WA .. pretty impressive use of getting a heart transplant. If only we could all use our gifts to progress knowledge of the world like this instead of procrastinating on slashdot like me.

But the distinction is that their loaning is not determined by their deposit amounts. Its restricted by their capital (which deposits are not a part of). This capital is mostly what shareholders have put in by buying stock from the bank. They don't even have to lend out less than the capital they have they can lend at multiple of that capital hence creating new non base money. Here is the capital ratio requirement for some large American banks: https://www.federalreserve.gov.... So BOA has a CET1 requirement of 10.4%. If they have capital CET1 of $10 they can create loans worth ~$961. That's $851 new money they can create out of thin air with that $10 CET1 capital.

To take an example say you want to borrow $1000 for a car, the bank looks at your asset valuation and your ability to pay the loan and goes ok. When they create a loan they create an asset for the bank (the loan) and a liability for the bank (your deposit of that $1000). So they don't have to have the money to create this just the ratio amount of total loans to their capital has to be met. That new deposit is new non base money. Then you take that deposit and buy an an asset like a car. The car dealership's bank wants money from your bank. But they don't take that $1000 deposit, banks transact with each other in base money. So from your bank to their bank the reserve money (base money) equivalent is transferred - this is not money like you have in your deposit accounts its money only banks have with the federal reserve. If your bank is short on reserve they go and borrow that reserve from another bank at the interbank rate or the federal reserve. The supply of this reserve is what controls (or at least used to) interest rate levels. So their lending is not constrained by their deposits. It is only constrained by their assessment of the asset value, their belief in your ability to pay the repayments, their ability to borrow reserve from the fed/interbank and their capital ratio.

I could be wrong about the above - wouldn't be the first time. happy to be corrected and learn something new.

Perhaps i'm mistaken, happy to be corrected - below is what i understand to happen.

Banks have to keep a % of deposits as exchange settlement, i think in the US they call it reserve. This is not the money you or i have in our bank accounts. Its base money they have to keep as a reserve. It's only cash that the RBA/Fed have and only banks can access it (ignoring actual cash/coins). This is what the RBA/fed use to maintain their target cash interest rate. They supply more if it to push the rate down and less of it to push it up so it stays within the band they want.

Say you want to borrow $1000 to buy an asset. The bank looks at the assets estimated value, your ability to repay the loan and if its all good they make the loan. They create the $1000 loan asset and $1000 liability deposit. There new non base money is created good to buy what you need. They haven't got a asset/debt problem - the loan is a rated asset balanced against their liability deposit. Lets say you spend that money and pay it to someone at another bank to buy that asset. Now they have to send reserve to that bank to clear the transaction and are down a ton of reserve. So they'd go and borrow reserve from the RBA or another bank at the interbank rate. The reverse would happen from other banks to this bank, overall this would drive up demand for reserve. I believe the RBA/fed would supply more reserve to keep the rate at the current target rate. So the constraint on creating this money isn't the amount of deposit (ie 'how much money they have'). It is more about if the asset valuation ok, can you really make the repayments and is the reserve interest cost worth it for how much they are going to make off of your interest payments.

Except banks don't work this way - they don't loan money like an average person. I'd have to have money to loan it out. Banks 'magically' create the money they loan out. That's the whole benefit of having a banking charter (and guess how those are given out). It is not deposits its not assets they own, it is literally how brand new money is created in the banking system. I am amazed that this is not taught in any economics classes in high school or even if you do accounting at university, at least in Australia. Details of how money is created from a pretty decent source - the reserve bank of australia: https://www.rba.gov.au/speeche...

I think this is not quite right - correct me if I'm wrong. That 1000 bucks the bank loans you, it doesn't have that money. They literally have the legal authority to 'create it' at that point. They don't even have to have some ratio of loans to deposits to do that these days. From the RBA: Money can be created, however, when financial intermediaries make loans. Accordingly, the concepts of money and credit are closely linked in a modern economy, albeit not one for one. https://www.rba.gov.au/speeche....