Where does the money come from for all the lending?

Thanks for all the follow ups.

The money comes from the labours of the people, and that's my two Euro cents.

Reply to
Dave
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Thanks John.

Wasn't quite what I thought it was, but I think I understand now!

Regards Mark

Reply to
Mark Blewett

Take a simple model: a bank has shareholder's capital S, it takes in deposits D, and makes loans of L; the rest is kept as a cash reserve C. The most basic principle is that assets and liabilities have to balance, i.e. L + C (assets) equals D + S (liabilities).

Broadly speaking there are two main rules. One is a reserve requirement that C/D has to be bigger than some amount like 10%, to cover the possibility that some depositors will want their money back. The other is a capital adequacy rule that S/L has to be more than something like 6% (about to change quite a lot under the new Basle 2 rules) in case some of the loans go bad and can't be recovered, in which case shareholders take the hit.

Reply to
Stephen Burke

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