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.
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