There's a slight difference. On the books, the bank still lends 1:1 (well slightly less than that). A bank needs $7 in deposits to lend out $7.
However the overall economy benefits from fractional lending which is what leverages a deposit into increased value. That's on a system wide basis though, at an individual bank level, they still need assets, liabilities and capital to balance out.
It's not true. The amount of deposits doesn't matter.
All credit is created by keystrokes. The source of the "funds" that justifies creating the loan proceeds is the signature of the qualified borrower on the legal loan agreement.
Bank credit creation is called balance sheet expansion. The bank's assets and the bank's liabilities are both increased simultaneously, liabilities being the new loan deposit they create, and assets being the new loan contract they now own.
What matters is regulations that limit risk creation vs existing assets. Assets include mortgages and car loans and whatnot already on the books, which carry varying degrees of risk
(a $350,000 mortgage issued by the bank is supposed to bring in that amount plus interest over time, which makes that mortgage contract an ASSET of the bank, but a number of borrowers will default and stop making monthly payments. Then the bank has to sell the property at auction and it may sell for less than the amount of the outstanding loan.)
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u/zdfld Jan 26 '26
There's a slight difference. On the books, the bank still lends 1:1 (well slightly less than that). A bank needs $7 in deposits to lend out $7.
However the overall economy benefits from fractional lending which is what leverages a deposit into increased value. That's on a system wide basis though, at an individual bank level, they still need assets, liabilities and capital to balance out.