Kimura
VIP Member
Edit to add:
Banks lends at profit through borrowing on the interbank market or straight from the FED to meet reserve requirements. In theory, a bank doesn't even need deposits in order to lend.
This is why the fractional reserve model is simply not applicable under our fiat/non-convertible currency.
Under current institutional arrangements, the total cost of reserves is key, not the availability of reserves. The FED will always make reserve available to a member bank to settle up on the interbank system. We're talking overnight rate and feds funds rate at the end of the day, and setting said rates is a key component of monetary policy.
Banks also have the option to move reserves into Treasuries to earn interest, or they can lend said excess reserves to other banks in the overnight market with rates set by the FED if the FED isn't paying IOR the same as or more than the overnight rate.
Banks lends at profit through borrowing on the interbank market or straight from the FED to meet reserve requirements. In theory, a bank doesn't even need deposits in order to lend.
This is why the fractional reserve model is simply not applicable under our fiat/non-convertible currency.
Under current institutional arrangements, the total cost of reserves is key, not the availability of reserves. The FED will always make reserve available to a member bank to settle up on the interbank system. We're talking overnight rate and feds funds rate at the end of the day, and setting said rates is a key component of monetary policy.
Banks also have the option to move reserves into Treasuries to earn interest, or they can lend said excess reserves to other banks in the overnight market with rates set by the FED if the FED isn't paying IOR the same as or more than the overnight rate.