By Ellen Brown.
Many authorities have said it: banks do not lend their (your) deposits. They create the money they lend on their books. … The Bank of England said it in the spring of 2014, writing in its quarterly bulletin:
… Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.
(In other words they did not take some of the money that you deposited and put that into someone else’s account.)
Ever since the Federal Reserve Act was passed in 1913, banks have been required to clear their outgoing checks through the Fed or another clearinghouse. Banks keep reserves in reserve accounts at the Fed for this purpose … When the loan of Bank A becomes a check that goes into Bank B, the Federal Reserve debits Bank A’s reserve account and credits Bank B’s. If Bank A’s account goes in the red at the end of the day, the Fed automatically treats this as an overdraft and lends the bank the money. Bank A then must clear the overdraft.
Attracting customer deposits, called “retail deposits,” is a cheap way to do it. But if the bank lacks retail deposits, it can borrow in the money markets, typically the Fed funds market where banks sell their “excess reserves” to other banks. These purchased deposits are called “wholesale deposits.” …
Note that excess reserves will always be available somewhere, since the reserves that just left Bank A will have gone into some other bank. The exception is when customers withdraw cash …
(It seems to me that when/if debtors can’t repay their debts that this affects the availability of reserves, too. That becomes an increasing problem as the debt balloon matures, which is where the world economy is now. Debtors can’t repay, and so the central banks are “expanding their assets” by buying up this debt. By this method they replacing debt in the system with “deposits”.)