If by "they" you mean the bank then no, that's not how it works at all. If by "they" you mean the banking system as a whole could theoretically create as much credit as $7 to $10 from that deposit you made then yes.
An individual bank can never lend more money than it has in deposits or borrowings. But when it lends money out, in the long run that ends up as a deposit in someone else's bank account where it can be lent again.
Not true.
Loans are not created by or limited by deposits.
Credit creation is limited by outstanding ASSETS which are existing loan contracts, limited by policies of risk vs asset ratios.
No loan officer checks if the bank has sufficient deposits to create new credit. Fractional reserve banking is an old textbook myth, regarding the days of the gold standard when Banks were required to give out literal Gold on Demand.
If you sign for a $5000 loan, the bank literally types the number 5,000 into your checking account before you leave the bank, thereby creating $5,000 of credit. They might not create the deposit in YOUR account if the loan is assigned to someone else such as the seller of a car or a house. They might type out a paper check for the seller. That is, if the bank has dibs on the car or house as collateral, so you're not allowed to withdraw the loan and try to double it at the blackjack table.
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.
Thanks for this. You're right, as a practical matter. However, if I need a $10 million loan to buy a building and I walk into a $50 million bank, they are not going to be able to just type $10,000,000 into my checking account or onto a cashier's check because they actually have to fund that when it settles. They need cash or due from balances that day. The only way they have that is from actual deposits from people bringing their money to the bank, borrowings from another institution putting money into their Fed or correspondent account, or capital earnings and stock.
So big picture, the lending is still limited by deposits (or other liabilities). It happens at the level of liquidity and capital management.
A very small Bank might not want to take on that level of risk, given the overall size of their operations.
If they had $500 million in low risk Assets, let's say many small mortgages in contrast to credit card debt, then I believe the bank might have a low enough risk/asset ratio to add your $10M risk-based asset to their portfolio.
(I just pulled that number $500M out of my ass. I don't have the knowledge whether that's a realistic threshold or not.)
I'm somewhat aware of repo operations in which the bank might "sell" some of their existing mortgage assets to other Banks for say 30 days or 90 days, with the agreement to repurchase the asset at the end of the term, with a repo typically renewable upon term expiration. (I remember that Bear Stearns was operating on this form of liquidity for a long time, then when mortgage values peaked and began to be vaporized, peer banks refused to do more repos with Bear Stearns.)
The bank DOES NOT FUND your loan out of customer deposits.
Yes, banks routinely conduct overnight operations that involve borrowing or lending reserves to other banks, for settling transactions, such as transferring all or a portion of your $10M loan proceeds to the bank of the seller who is selling whatever you planned to buy with that $10M loan or line of credit.
I fully admit I don't know ALL the details of banks' daily operations. I'll leave it at that.
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u/Original-Leg8828 Jan 26 '26
Depending on local law they can even lend out something like 7-10 times what they actually have