Out Their
Out Their
How is the money supply increased when banks lend out their excess reserves?
Banks are required to keep a certain percentage of their deposits on reserve, either in their own vaults or in their accounts at the Fed. This percentage of deposits that they are required to keep is called the reserve requirement. For example, if the reserve requirement is 5%, when a customer deposits $100 at the bank, the bank only has to keep $5 of that $100 deposit. The remaining $95 (called excess reserves) can be lent out to other customers.
This is called money creation by the private banking industry, in a fractional reserve system.
A second bank can borrow the $95 of excess reserves from the first bank in your example, set aside 5% of that ($4.75) to meet their reserve requirements, and loan out their excess reserves ($90.25) to a third bank, and so on and so on.
The important thing to understand is that in our system, the government doesn’t create money, the private banking system does.
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