[simulate-me]

Fractional reserve banking lends out deposits. This creates risk, but the net assets on the books remain the same (actually assets increase due to interest). With USDT, they may have bought something like commercial paper, which would be similar to fractional reserve banking, or they could have spent it on something irreversible (e.g. a dividend) and thus the net assets on the books is lower than the amount of USDT. It's unknown which situation applies to USDT.

[VirusNewbie]

It’s not quite that simple, no? If I deposit 1M in the bank, that bank can loan you 900k. You then buy a Bugatti from me for 900k, which I then put into the same bank. Then the bank loans you 810k to buy an NFT from me…

[simulate-me]

If the bank has 1M deposits, its net assets are 0. It has 1M is cash and has 1M in liabilities to depositors. If the bank loans out 900K, then it still has 0 net assets. It has 1M in liabilities to depositors, 100K in cash, and an "IOU" worth 900K (ignoring interest). Tether is different. When it mints and sells 1M USDT, it gets 1M is cash, but doesn't have any liability to Tether holders other than the honor system. It could easily pay a 500K dividend to its owners and no one would know.

[stephen_g]

What you describe is called the “money multiplier model” and yes, it’s not how the actual economy or actual banks work.

This document [1] from the Bank of England (UK’s central bank) is the best description I know of about how those ideas (“fractional reserve”, banks lending out deposits, “money multiplier” etc.) are wrong.

1. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

[stephen_g]

That’s not true. It’s not just that real-world banks don’t do that, they just plain aren’t allowed to “lend out deposits”.

I guess you could say “fractional reserve banks” do, because “fractional reserve” is a textbook model and not something that happens in the real world.

The problem is that deposits are a liability. Banks can only lever up assets to lend, so deposits are on the wrong side of the balance sheet to do that. What limits how much banks can lend is capital (and capital adequacy ratios), not deposits.

Banks create new deposits when they lend, as well as creating an equal amount of private debt. The loan is an asset of the bank, which creates a corresponding liability.

Customer deposits coming in as cash or transfers from other banks are useful as liquidity, but can never be lent.

Some details if you’re interested: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

[kgwgk]

> The problem is that deposits are a liability. Banks can only lever up assets to lend, so deposits are on the wrong side of the balance sheet to do that.

When someone makes a deposit in a bank it goes on both sides of the __balance__ sheet. On one side the "deposit" is a liability for the bank - who owes money to the depositor - but on the other side it increases the bank's "reserve" account.