Banks Do Not Entirely Need Your Money to Make
If banks don't need money, where bank loans come
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
to make bank loans available, being able to loan usually 10 times their available
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 loans.
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