|
 |
Home >> Lending
Deposit Related to Lending
If I deposit $1000 in a bank, and the required reserve rate is 10%, can the bank lend out $10,000, or just $900?
|
|
 Theoretically, the bank can lend ten times the deposit, if the funds it lends are always deposited in a transaction account in the same bank with a 10% reserve requirement. If the reserve requirement were 20%, the multiple drops from 10 to 5.
In fact, the theoretical multiplier is always the reciprocal of the reserve requirement expressed as a fraction.
10% = 1/10, multiplier is 10/1, or 10
5% = 1/20, multiplier is 20/1, or 20
20% = 1/5, multiplier is 5/1, or 5
etc.
Published on BankingQuestions.com 8/27/09
|
| |
|
Accounts
Article
Q&A
Podcast
Video
Blog
Discussions
PDF
Powerpoint
