Reply To: Fractional Reserve Banking Requirements


I believe the description of banking put forth in Mystery of Banking and indeed most economics literature, that which leads to the existence of a “money multiplier” based on reserve ratio, is severely outdated.

One should look into the topic of “Endogeneous Money” to get a more accurate picture of the banking system. ( Also “Understanding The Modern Monetary System” at

In short, banks are never constrained by reserves. Banks are always capital constrained. Banks do not need reserves to make loans. Indeed, banks periodically seek reserves *after* the loans are made. So, it is irrelevant if you deposit $100 in the bank. If the bank finds a worthy borrower in demand of a loan then the bank will make the loan, and then seek the reserves afterward, purely for liquidity and regulatory reasons.

The ONLY constraints are capital constraints, and on that topic I post here an excerpt from a discussion I had with someone with experience in the banking industry:

“So, the TLDR; is that banks are technically constrained by their base “Capital” — that is they are only allowed to make a grand total amount of loans that is LESS than what the expected risk of default will be — so if a bank estimates that the “risk” of it’s portfolio or loans defaulting — going totally bad and left unpaid — is say 10%, then with base capital of say $100 million, that bank will not lend more than $1 billion in total (and indeed will stay far SHY of that total). “