I stand by my statement "Banks create deposits "out of nothing" when they make a loan."
Yes, the bank must have the cash (or rather the deposit in their RBA account obtained by handing the cash to the RBA), but that cash often has been obtained from someone else depositing money with the bank. The depositor's cash has been rehypothecated, it notionally backs the short term liability the bank owes the depositor, but actually has been sent to another bank to settle the cheque written against the deposit loaned into existence. The problem is not so much that the depositor's cash is gone, but that the maturity of a non-term-deposit is radically different from the maturity of the loan.
One thing I am not clear on is the extent to which banks borrow from each other and the central bank at the officially-targeted overnight interest rate. Such borrowing can smooth or net out the lumpiness of interbank transfers over time, as bank customers transfer funds between them. This surely enables a very small amount of cash to be leveraged up hugely. The UK seems to be a much-favoured destination for rehypothecation almost without limit as the regulation is pretty light. Is this how the the UK has managed a debt to GDP ratio of something like 600%?
