Banks Do Not Entirely Need Your Money to Make
If banks don't need
money, where bank loans come from?
When people and institutions apply for loans and they are approved, they will get
it whether people have made deposits or not. This leaves many with a question of where they get money from if not
entirely from deposits. Banks operate differently from how we think. Although they still use the deposits made by
people to replenish their reserve, they can still make loans without them.
Banks do not entirely need your money to loan to others because they have a sophisticated operation policy regulated by the
central bank. They also liaise with other banks in well-calculated procedures to sort this issue out.
|It might come as a surprise, but with Fractional
Reserve Banking banks don't need your money
to make bank loans available, being able to loan usually 10 times their
Although we have said that banks do not entirely rely on your money to make loans,
deposits are by far the primary source of a bank’s capital. As we are going to see, only a small number of deposits
are needed. Unlike what people think, the power of lending is not directly proportional to the deposits.
When customers make deposits, the bank's reservoirs are replenished and this
allows the banks to lend as much as ten times that amount because of the fractional reserve policy that we are
going to see below.
Fractional Reserve Banking
In this system, the bank
should not have cash at hand equivalent to the deposits it is holding. But it can only have only ten percent of
the total. Thus, banks have the other 90 percent available to give out for loans. The central bank is aware of
this and regulates it when managing the bank's account.
The primary goal is to build the economy by availing as much money as possible the
people in the form of loans. See, the banks are not desperate for your deposit to have enough to lend out as
Banks can reach for this money when they want to loan out more money. It is
considered as part of the capital that the bank will almost always use to make loans. The bank investors make this
possible when they buy shares and provide the bank with capital.
Further, some of them also assist others in boosting their credit scores, as
advised by the Boostcredit101 website, to access these loans. So, this makes the shareholders a crucial part of
success in the business of making loans.
Loans and Interests
Upon the issuance of loans, both the loaned amount and the interest becomes an
asset for the bank. It may sound complicated to a layman, but the bank does it this way. Later,
the loans people
borrowed will be deposited when they buy a car, home, or anything
else, and it will become a deposit either to the lending bank or any other.
As mentioned above, banks work more or less together and the gap left when they
gave you the loan is now filled. So, we can say that loans create deposits at the end of the day.
Banks do not entirely need your money to make loans, they have many options as we
have seen from the above. So, now that you know how it works, you should not be afraid to go get a loan if your
credit rating and source of income allows.