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im aware that the whole "they take a fraction of your deposits and lend it to other people" is a myth. banks lend money created out of thin air, and that's primarily how money creation occurs.

if so, however, what's happening to my deposits? i read a yahoo article that talked about deposits simply being used to fulfil reserve requirements  but the reserve requirements are currently ZERO

so... what's going on with the money that i've deposited at the bank????

if i have any misconceptions do clarify! thanks!

37 Answers

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Simplish explanation:

-they take leverage against your deposit, they loan a portion of that leveraged amount to retail/commercial client and they trade/invest some of it in the markets or investment banking activities (where more leverage is often used)

-At the end of the day, they are required to keep roughly 13% of the balance sheet in liquidities (Cash and equivalents)

-In most Western countries the government act as backstops for the banking system (they will bail out the big players). This results in additional costs for banks which they counterbalance by being able to charge more to customers because governments allow few competitors to enter the market which results in sub-optimal pricing, mostly for retail
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In the U.S., banks do loan money out and they can loan more money when, *all else being equal* (key statement), they have more deposits.

Just because a bank’s reserve requirement is a very low fraction of the total doesn’t mean their reserve requirement is literally zero.  **They do have an ‘ample reserve’ requirement still, even if that reserve requirement is not a % of deposits.**

I hate to say it, but your thesis is a myth.

Can you also define what you mean when you say money is created “out of thin air” in a context where you almost imply banks are free to just change their ledgers at will?  That certainly is not true, so I’m curious what you mean by that statement.

FWIW, Bitcoin is awesome.  I’m about as close to a maxi as you can get without actually being one.  That doesn’t mean I’m going to accept incorrect statements about how banks work.  

But here is something that *is* true:  When banks takes your deposits and only have a small fractional reserve requirement, they can loan out a lot of that $, but after it gets spent (usually loans are taken out to make purchases), a lot of it gets deposited back into the banking system, increasing their reserves above the minimum requirement and so they then can loan that out, and the cycle keeps going on and on for many iterations.

Of course this is overly simplistic and banks offer a wide range of financial services, not just taking deposits and providing loans, but it’s closer to reality than some nonsense a random Reddit user posts as a meme or slogan.
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And... It's gone...
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They use it
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“Aaaaaaaaaaand it’s gone!”
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No you have it slightly wrong but your on the right path. They don’t take a fraction of your deposit and lend it. What they do is your deposit is a fraction of the amount the turn around and lend out. So they are lending your entire deposit balance and then some to other people. Technically there’s an amount they have to have in reserve - it changes based on regulations but let’s use 5% for this example. If you deposited $100 they could lend out $2000 so long as they kept $100 on hand in case depositors asked for their money back. That’s why they call it fractional reserve banking. And this is exactly how our banking system works.
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> what's happening to my deposits

What do you mean by "my deposits"? Are you talking about physical cash that you deposit in your bank account?

> the money that i've deposited at the bank

The bank can do whatever it wants with the physical cash that you deposit so long as they have enough risk-adjusted capital to back your deposit, and so long as they have enough liquidity to allow you to withdraw on demand.

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