In the Banking System, the Causation Runs From Loans to Deposits, That is: ‘Loans Create Deposits’.
In: Flash Cards
Explanation why: When a bank agrees in making a new loan, it credits the agreed amount on a bank account. The only constraint for the bank is when the borrower spends the loaned amount; it will have to clear the payments using reserves at the Fed. Making more loans increases the need of reserves that the bank obtains either in the interbank market or directly from the central bank. Either way, the bank pays an interest that measures the cost of funding the loan.
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