If banks may lend money they don't have (fractional lending), How can they lose?

Discussion in 'Economics' started by crgarcia, Feb 10, 2009.

  1. If you have $100
    and you lend $300
    $200 of those were bad loans and you don't get anything paid back,

    Isn't it a free ride?
    How banks lose?
    Am I missing something.
    Where's the catch?
  2. The problem is when you have $100, lend $2000 and $500 doesn't get paid back.

  3. The catch is here:
    if you have $100 and reserve requirement is 10% then you can lend $90

    then, if the $90 that was lent is deposited back in your bank, you can lend $81 more (etc. but two levels is enough for this example).

    that's how $100 initial deposit turned into $90+$81=$171
    but the total amount of deposits is $100+$90=$190. If bank loses those $171, how is it going to repay the $190 when demanded?