"Firstly, here’s a short explanation of bank
lending. Under normal circumstances, deposits and loans are more-or-less equal
across the banking system as a whole. This is because when a bank creates a new
loan, it also creates a new balancing deposit. It creates this “from thin air”,
not from existing money: banks do not “lend out” existing deposits, as is
commonly thought."
"When the Fed buys private sector assets from
investors, it not only creates new deposits, it creates new reserves. This is
because a new deposit (liability) in a bank must be balanced by an equivalent
asset. When banks create deposits by lending, the equivalent asset is a loan.
When the Fed creates deposits by buying assets, the equivalent asset is an
increase in reserves, also newly created. So it does not matter how much
lending banks do, if the Fed is creating new deposit/reserve pairs by buying
assets from private sector investors then deposits will ALWAYS exceed loans by
the amount of those new reserves."
http://www.forbes.com/sites/francescoppola/2014/01/21/banks-dont-lend-out-reserves/
