How to Rob a Bank… From the Inside

Banks are fantastic wealth-creation machines. Here’s how it works:

  • I create the Bank of Elaine with zero assets.
  • Foodstamp Fred shows up and asks for a $100 loan.
  • The bank creates an account for Fred with a $100 deposit. The bank now has $100 worth of assets in the form of a loan.
  • Banks have a 10% capital requirement for loans, so I sell some shares of the bank for $10.
  • Fred would like to withdraw his $100 deposit in small unmarked bills.
  • Bank of Elaine doesn’t have $100, so it borrows the money from another bank. Actually, ElaineBank borrows $300, using this $100 loan asset as collateral.

And that is how wealth is created.

See Also:
Basics of Banking: Loans Create a Lot More Than Deposits –CNBC

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