drkitten, do you wanna take this one?
I'm on it. (Putting the E in JREF.....)
So A4V is based on an idea that the signature is currency, and as the bankers can't lend money they don't have it does fit that the bank funds a loan from a pot that is accesed by the signature.
Not really. Banks fund loans from the pot of deposits they already have. Essentially, they double-count the money (it's owed to two places at once), which sounds problematic in theory but in practice is generally sound.
Are banks allowed to lend on the strength of their asset
That's exactly what they do.
What do you think happens to money you deposit in the bank? The bank needs to generate income somewhere -- aside from the fact that they have rent to pay, equipment to buy, and tellers with an annoying habit of eating regularly, they also owe me interest on my deposit. They make their money by re-lending out the money that I deposit. The old rule of 3-6-3 covers it quite well. "Pay interest at 3%, charge interest at 6%, be at the golf course at 3pm."
i believed that if a bank had £1M in assets that it was able to lend up to 10 times that amount - but i do not know or understand where the £9M in loans is from.
Re-lending. Let's assume that I deposit $1000 in crisp new twenties into the bank. Then someone (maybe you) comes along and wants to borrow $1000 to buy a new stereo system for their band. The bank checks out the credit report and says "sure, here's the $1000 [and you owe us $1/week in interest on top of that]," and then they hand you
that same stack of twenties.
At this point, you go buy your equipment, and the electronics dealer has the twenties. But he doesn't want to carry a stack of twenties with him, so he's going to go back to the bank and deposit that stack into his account.
At this point, a third person can come along and ask to borrow $1000, and get handed
that same stack of twenties, which he spends and gets redeposited in the bank. After ten such people, the bank has total deposits of $11,000, plus outstanding loans of $10,000. So the bank's "capital" is still only $1000 ($11,000-$10,000) but they've lent that stack of twenties out ten times
In theory, there's no limit to the number of times that stack of twenties can go in and out of the bank. It could get handed around until the numbers are worn off the bills. In practice, the law says that you can only lend out, say, half of the money you get deposited. So the bank could only give you $500 of my initial $1000, and then give the third person $250 of the redeposited $500, and then the next borrower $125 of the redeposited $250, and so forth.
$500 + $250 + $125 + ... = $1000. So if the bank can lend out half of the money, $1000 in assets supports $1000 in loans.
But at this point the bankers start to whine "why can't I loan out 80% of the money instead of half?" If that were the case, you could get $800 of my initial $1000, the third guy could get $640 of the redeposited $800, the next $512 of $640, and so forth.
$800 + $640 + $512 + ... = $4000. So if the bank can lend out 80%, $1000 in assets supports $4000 in loans to the community.
If the banks can lend out 90%, $1000 in assets supports $9000 in loans.
If the banks can lend out 95%, $1000 in assets supports $19000 in loans.
If the banks can lend out 99%, $1000 in assets supports $99000 in loans.
So why don't banks just lend out
all their money? Well, because the law won't let them. But the reason the law won't let them is because they still need to have enough cash on hand to cover
the amount of deposits they expect people to withdraw. The chances of my withdrawing all of my money is pretty slim. The chances of everyone withdrawing all of their money at the same time is even slimmer. But the chances of my dropping by to withdraw $50 or so is pretty good, so they need enough cash on hand to cover that.
yet
