Your team keeps every dollar it owns sitting in its own bank. A real bank would lend out about 90 cents of each one, and the money would still be "yours". This week you see how that works.
Learning objectives. After this week you can (1) explain how banks connect savers and borrowers; (2) read a simple bank balance sheet; and (3) compute the money multiplier.
Remember this: your deposit is your asset, and the bank's debt to you.
1) What banks do
Banks are financial intermediaries: they take deposits from savers and lend them to borrowers. They earn the spread, the gap between the rate they charge on loans and the rate they pay on deposits.
Example. A bank lends $10,000,000 at 8% and pays depositors 3% on the same $10,000,000. Interest in: $800,000. Interest out: $300,000. The spread earns the bank $500,000 a year.
2) The bank balance sheet
To the bank, deposits are liabilities (it owes them back to you). Loans and reserves are assets (things it owns). What is left over belongs to the owners:
Capital = Assets − Liabilities
3) Fractional reserves and the money multiplier
Banks keep only a fraction of deposits as reserves (cash in the vault or at the central bank) and lend out the rest. That loan gets spent, deposited at another bank, and lent again, so the banking system creates money. The simple multiplier says how far one deposit can stretch:
Money Multiplier = 1 ÷ Reserve Requirement
| Reserve requirement | Multiplier | $1,000 deposit |
|---|---|---|
| 10% | 10 | $100 held, $900 lent |
| 20% | 5 | $200 held, $800 lent |
| 25% | 4 | $250 held, $750 lent |
At 10%, a $1,000 deposit can support up to 1,000 × 10 = $10,000 of money across the whole system.
4) Why banks can be fragile
Banks borrow short and lend long: deposits can leave tomorrow, loans run for years. That mismatch means no bank can pay every depositor at once. A bank run is many depositors withdrawing together. Deposit insurance protects depositors so they have no reason to run.
Quick self-check
(a) With a 20% reserve requirement, what is the multiplier? (b) A bank receives a $2,000 deposit at a 25% requirement. How much must it hold? (c) Is a loan the bank made an asset or a liability for the bank? (Answers: 1 ÷ 0.20 = 5; $500; an asset.)
Common mistakes
- Calling deposits a bank asset. To the bank they are a debt it owes.
- Multiplying by the requirement. The multiplier is 1 divided by it.
- Mixing up lent and held. At 10%, $100 is held and $900 can be lent.
This week in the arena
Your team runs on cash alone, with no bank in the middle. So picture one: if a bank lent you this week's whole budget at 8% while paying its depositors 3%, what would it earn on you? Work that out from your planned spend before Saturday.