Comment on how much money is there in total?
gandalf_der_12te@feddit.org 19 hours agoA bank can have $1 mil on hand and lend out $10 mil plus, as long as they have a high enough percentage available for withdrawals.
yeah but they have to pay back the $10M eventually, at least formally, so they have that as debt at the same time. thus the sum is zero, where they were before.
RoidingOldMan@lemmy.world 19 hours ago
In this example the bank started with $1 million total. Loaned out $10 million. If the guy paid back $10 mil, the bank would have 10x their starting money.
LastYearsIrritant@sopuli.xyz 3 hours ago
No, because they gave that $10 million to someone else first.
The bank became $10,000,000 in debt, then recovered it (with interest) what the bank gets in the end is the interest above the $10,000,000.
An example would be that a bank goes into $10,000,000 debt on paper, recovers $11,000,000 including interest, now bank has $1,000,000 extra due to it’s risk that the person paid their debt.
Assuming the bank is FDIC insured - If that money wasn’t paid back, the bank would have to sell that debt to a collector to get some of it back. If they did their risk calculations correctly than enough people would pay rather than default that they make a sizeable amount of money. If they didn’t, then the federal government takes over the bank, sells it to someone who can afford to handle the debt/credit load, and covers accounts due any lack of funds.
In theory this means that the bank is still required to keep their risk low enough to maintain their FDIC status. In practice it’s a lot more complicated and sometimes (but rarely) banks don’t get punished for risky bets that don’t pay off.