From the investopedia page: If bank lending is constrained by anything at all, it is capital requirements, not reserve requirements; however, since capital requirements are specified as a ratio whose denominator consists of risk-weighted assets (RWAs), they are dependent on how risk is measured, which in turn is dependent on the subjective human judgment.
In a fractional reserve system, the government says “for every 10 bucks you have lent out, you have to have a dollar in cash”. So you’d think if you deposit a dollar, then the bank can lend out 10 bucks, right?
Nope. The bank can lend out infinity dollars, and worry about the cash later. After all, they can just borrow it from another bank if they can’t get people to deposit it.
A capital requirements system dictates a ratio of capital to debt instead of cash to debt. Capital is money that *belongs to you*. You can’t borrow money to make up capital, because your debt goes up too.
I think what they’re saying is that banks can do whatever the hell they want.
If they have any rules that keep them from loaning money out at all, it’s the one rule that says they have to have so much stuff that for sure belongs to them first. But really, they are allowed to guess how much they think that is, so – no rules. They do whatever they want.
Too much bank shit is self policed it’s insane.
If banks have 100K in liabilities (the money in their customers accounts) they’re required to have a certain amount of assets to cover those liabilities, these assets include things like cash and bonds but also the value of the loans that people are repaying.
They can’t include the full value of the loan as some people won’t pay them back, so they need to calculate what percentage of each loan they’re likely to get back, if it’s 90% then they can only count 90% of the loans value, that’s the risk weighting.
There’s no perfect way to decide if it’s 90% or 95% or 87% though, human judgement has to be used so 2 banks with the exact same assets might come to different conclusions about how much capital they represent.