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Comment by lupire | Hacker News Reader

No, fractional reserve means that they can lend out $800K of the $1M deposited, even though the $1M is still counted as the depositor's money and also $800K is a available to lend.

https://en.m.wikipedia.org/wiki/Fractional-reserve_banking

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But there's no multiplier as you describe it. It appears though. First deposit $1M. Then create that loan for 800k, and deposit it right back in the same bank. Now the bank has $1M versus 800k loans so the reserve is back above the 20 percent reserve requirement. We don't even need to work out the math, just keep repeating the process with smaller loans until we reach our limit at the reserve, which clearly must be (the very same) $1M in deposits, and the max of $4M loans, making for $5M total. Accounting rules to prevent this being done by a single bank alone just means it takes more banks trading loans to get the same effect. Rather than a wonky description of the rules, basic econ class still has the variations covered.

Can you describe the mechanism by which deposits held by a bank are lent to borrowers under the fractional reserve system described in that Wikipedia article?

"Fractional-reserve banking is the system of banking operating in almost all countries worldwide,[1][2] under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers"

Yes now it says:

“to lend the remainder to borrowers”

Can you describe how money that a bank has in deposits is lent out to borrowers?

Ok you then make an agreement with another bank and that constraint is literally irrelevant.

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