What happens when someone pays his debt in a fractional-reserve banking system?

What happens when someone pays his debt in a fractional-reserve banking system?

What happens when someone pays his debt in the fractional-reserve banking system?

Is usually his past debt subtracted from the haven or additionally all successive debts which was loaned to alternative people with his primary debt?

For instance, the chairman A borrows 100$ afterwards it becomes partial of the reserve, afterwards the chairman B can borrows from his deposition 80$, afterwards the chairman C 64$, since the haven order of 10% for banks.


Subscribe RSS 2.0 feed.Leave a response when people search for from your own site.

One Response to 'What happens when someone pays his debt in a fractional-reserve banking system?'

  1. simplicitus - February 1st, 2010 at 12:06 am

    I think you have it backwards. When person A borrows $100, it does not become part of the reserve. But I understand your real question.

    Say the bank gets a deposit of $100. The reserve requirement says that for each $100 it has in deposits, it can issue X dollars in loans. So a $100 deposit increases its ability to make loans by $X.

    Now suppose it has already loaned out all that it is allowed to. If a borrower repays the loan, the bank has less outstanding than it is allowed to, and so can loan that money out again.

    Now suppose a depositor wants his money back. Now the bank has less money and so it is not allowed to loan out as much. If it has actually loaned to its limit, it is in trouble and either has to call in some loans or get some new deposits ASAP.

    To avoid this, the banks pay attention to how much money they expect depositors to withdraw each day and make sure they have enough to cover it. At the same time, they don’t want their money just sitting around doing nothing and earning no interest.

    That’s why the banks always have some of their money out on "overnight loans". This is money they know they can get back the next day.
    http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V7T-4HYMSJY-1&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=22487fbd87f0f15b9f9be1abdba42d2b
    http://ideas.repec.org/p/fip/fedgfe/2004-29.html

    One of the problems with the current financial crisis is that banks no longer trust other banks to be able to pay back these short term loans promptly, which has raised the interest rates on these loans:
    http://www.washingtonpost.com/wp-dyn/content/article/2008/09/30/AR2008093002629.html


Leave a Reply