https://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp
In March 2020, the Board of Governors of the Federal Reserve System reduced reserve requirement ratios to 0%, effectively eliminating them for all depository institutions.1
How Banks Make Loans in the Real World
In today’s modern economy, most money takes the form of deposits, but rather than being created by a group of savers entrusting the bank withholding their money, deposits are actually created when banks extend credit (i.e., create new loans). As Joseph Schumpeter once wrote, “It is much more realistic to say that the banks 'create credit,' that is, that they create deposits in their act of lending than to say that they lend the deposits that have been entrusted to them.”2
When a bank makes a loan, there are two corresponding entries that are made on its balance sheet, one on the assets side and one on the liabilities side. The loan counts as an asset to the bank and it is simultaneously offset by a newly created deposit, which is a liability of the bank to the depositor holder. Contrary to the story described above, loans actually create deposits.
Now, this may seem a bit shocking since, if loans create deposits, private banks are creators of money. But you might be asking, "Isn’t the creation of money the central banks’ sole right and responsibility?" Well, if you believe that the reserve requirement is a binding constraint on banks’ ability to lend then yes, in a certain way banks cannot create money without the central bank either relaxing the reserve requirement or increasing the number of reserves in the banking system.
The truth, however, is that the reserve requirement does not act as a binding constraint on banks’ ability to lend and consequently, their ability to create money. The reality is that banks first extend loans and then look for the required reserves later.
Firstly, it is entirely incorrect to say that money is “spirited from thin air.” It is not. Indeed, Zoe herself said it is not, in the previous paragraph. Money is created when banks lend. The rules of double entry accounting dictate that when banks create a new loan asset, they must also create an equal and opposite liability, in the form of a new demand deposit. This demand deposit, like all other customer deposits, is included in central banks’ measures of broad money. In this sense, therefore, when banks lend they create money. But this money has in no sense been “spirited from thin air”. It is fully backed by a new asset – a loan. Zoe completely ignores the loan asset backing the new money.
Nor does the creation of money by commercial banks through lending require any faith other than in the borrower’s ability to repay the loan with interest when it is due. https://www.forbes.com/advisor/mortgages/best-mortgage-lenders/" aria-label="Mortgage lending">Mortgage lending does not require ever-rising house prices: stable house prices alone are sufficient to protect the bank from loan defaults.
