Imagine there are two banks. Two different countries and different currencies.
Bank 1 can be in America, using Dollars.
Bank 2 in Japan, using Yen.
Let’s say that both banks only have a certain amount of money both equal to each other, if exchange rates were perfectly even. $100 for the US Bank, ¥100 for the Japan bank. Each 100 belonging to a single account holder from their respective banks.
If the US holder of the $100 gifts his money to the Japan holder of the ¥100 via wire transfer or whatnot, how does the Japan holder receive that extra $100 if the Japan bank only has the ¥100 in stock? What happens to the $100 in the US Bank if it’s technically been transferred to a different country and currency? Am I missing something here and going about this whole thing wrong? I’ve always been curious about it.
In: Economics
First of all, if you have an account at a bank with $100 in it, the bank doesn’t have a pot of money designated “u/TheJemlok’s money”. In fact, banks in the US are only required to keep 10% of the total value of their deposits on-hand.
So if you wanted to send $100 to someone in Japan, they would simply deduct $100 from your account balance and send $100 worth of the stash of yin they keep for situations like this (any decent-sized bank will do this).
If, for some reason, your bank doesn’t have enough yen on-hand to complete the transaction, they would simply buy some on the foreign exchange market.
Well, on the sender’s side, it’s simple: the bank just deducts money from that client. Then, bank creates SWIFT instruction (SWIFT is a worldwide system for handling transfers between banks) for a recipient bank to create a record of receiving 100$ from the sender’s bank and to give to the recipient these 100 $ (which recipient’s bank will exchange to yen if client does not have dollar account). There may also be, but not always, correspondent banks in between and, additionally, on all of the stages any bank acting in this transfer may take a fee either from sender (then sender pays more than 100$) or recipient (recipient then receives less than 100¥).
In other words, it doesn’t matter how much money does any of these banks have physically, the transfer occurs between banks electronically.
PS. Please correct me if I miss some important operational detail.
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