The common fractional reserve banking narrative is a myth; banks do not need deposits to lend, and lending is governed by capital requirements, not deposit balances.
• Traditional view: banks lend your deposits in multiples (e.g., 10x) and pay interest on your money. This is false; deposits are liabilities, not bank capital. • Banks lend based on capital adequacy rules, risk-weighted assets, and systemic considerations, not the amount of deposited money. Basel III regulations set minimum capital requirements, typically starting around 8%, but this is adjusted for risk, loan type, and bank size. • Lending creates deposits, not the other way around; a bank could operate with minimal or no customer deposits if it meets capital requirements. • Reserve requirements (often 1–2%) are much lower than capital requirements and are supplemented by interbank borrowing or central bank discount window access. • Offshore banks may follow more traditional reserve lending, as they lack access to central bank liquidity or interbank markets, making them more dependent on actual deposits.
Takeaway: The amount you deposit does not limit a bank’s ability to lend. Understanding the difference between bank capital and deposits clarifies why fractional reserve “multiplication” is misleading and why lending depends on capital adequacy and credit demand, not deposit balances.
