Banks are in the business of loaning money, so it may come as a surprise to you that they don’t actually need your money to do so. In fact, banks only keep a small fraction of their customers’deposits on hand, and the rest is loaned out to other people or invested. So, if banks don’t need your money to make loans, why do they bother collecting deposits? The answer has to do with regulations and the interest they can earn on those deposits. In this post, we’ll explore why banks don’t need your money to make loans and how they use your deposits to their advantage.
How do loans work?
Most people believe that banks need deposits in order to make loans. However, this is not true. Banks can actually create money out of thin air when they make loans.
Here’s how it works: When a bank makes a loan, it simply credits the borrower’s account with the amount of the loan. The money doesn’t come from anywhere – it is created by the bank out of thin air. This new money then enters the economy and is used to buy things like houses, cars, or businesses.
The important thing to remember is that when a bank makes a loan, it is also creating money. So, if you’re wondering why banks don’t need your money to make loans, it’s because they can just create the money themselves!
Why don’t banks need your money to make loans?
The simple answer to this question is that banks don’t need your money to make loans because they are able to create money out of thin air. This may sound like a magic trick, but it’s actually just how our monetary system works.
Banks are able to create money through the process of fractional reserve banking. This is when a bank keeps a certain percentage of deposits on hand (reserves) and loans out the rest. The amount of reserves required by law varies from country to country, but is typically around 10%.
So, if a bank has $100 in deposits, it can loan out $90 and still meet the reserve requirements. As long as people keep their money deposited in the bank, the banks can keep lending it out and making profits.
Of course, if everyone suddenly decides to withdraw their money from the bank, then the banks would be in trouble. But this is why they keep a portion of deposits as reserves – to protect against sudden withdrawals.
What are the benefits of this system?
The banking system is designed to make money for banks, not to benefit their customers. When you deposit money in a bank, you are essentially giving the bank a loan. The bank then uses that money to make loans to other people, and charges interest on those loans. The difference between the interest charged on the loans and the interest paid to depositors is how the bank makes its profit.
So, if you’re wondering why banks don’t need your money to make loans, it’s because they’re already making plenty of money off of the money they have. They don’t need your deposits to keep their business going – they’re doing just fine without them.
Are there any drawbacks?
Yes, there are some drawbacks to this system. For one, if a bank has made a bunch of loans and then something happens that causes people to stop paying them back (like a recession), the bank can find itself in trouble. Also, if a lot of people want to take their money out of the bank at the same time (like during a financial crisis), the bank might not have enough cash on hand to give everyone their money. This is called a “run on the bank.”