alt Hacker NewsIt can be difficult to figure out whether the theoretical limit is 10x or 100x in my mind because there isn't a reserve ratio federally (well, there is one, but it's zero) , and the other regulations surrounding that aren't so cleanly understood in a neat formula.
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> It can be difficult to figure out whether the theoretical limit is 10x or 100x in my mind because there isn't a reserve ratio federally (well, there is one, but it's zero)
I know what you're thinking of here, but it doesn't mean anything like what you think it means.
So the US used to have a rule that every bank hand to have a certain percentage of its assets stored in its account at a Federal Reserve bank; it is this percentage which was gradually reduced to 0 by I think 2020. Note that only the funds in that account meet the requirement; a literal pile of cash contributes not a single cent.
The way banks are primarily limited nowadays is via capital adequacy ratio, which is essentially that you need to set aside a particular pile of capital that can be raided to guard against assets falling in value to 0. It's complicated because this pile of capital doesn't come from the money a customer deposits in their account (which needs to be held as an asset to offset the liability a depositor represents), but rather from income the bank makes in other ways. If a bank sells $1 million worth of shares, they get to issue ~$20 million more loans.
If a bank gets $1 million worth of new deposits, they get to issue... $0 more loans. Well, maybe less: if a bank gets $1 million worth of new bitcoin deposits, that probably reduces its capital ratio because bitcoin is such a risky asset.
Lots of places, eg Canada, never had a legally mandated reserve ratio.
Fractional reserve banking has economic limits, even when there are no legal limits.
Extremely simplified:
When I deposit a dollar, the bank records a $1 deposit liability. If the bank makes a $1 loan, it creates a new $1 deposit for the borrower.
If that dollar is spent and redeposited, deposits increase even though the amount of base money has not. It looks like multiplication, but what’s really happening is that loans and deposits are expanding together on the balance sheet.
The bank is not creating wealth out of nothing. It now has matching assets (loans owed to it) and liabilities (deposits owed to customers), backed by capital that absorbs risk.
With reserve ratios effectively zero, lending is constrained by capital requirements and risk management, not by reserves. Banks cannot recirculate a single dollar endlessly without sufficient capital.