Thanks John.
Wasn't quite what I thought it was, but I think I understand now!
Regards Mark
Where does the money come from for all the lending?
May 07, 2004
22 Replies
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.
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