How would banks make loans?

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After the reforms, banks would need to borrow money from savers before they could lend it to borrowers (instead of being able to create money by lending). So they would be real middlemen (intermediaries), and banks would move money from A to B, rather than creating new money each time a loan is made. In the post-reform banking system, a bank will only be able to make loans using money from one of the following sources:

  1. The money that bank customers give to the bank for the purposes of investment, i.e. money in specified ‘Investment Accounts’.
  2. The bank’s own funds, for example from shareholders or retained profits.
  3. Any borrowings from the Bank of England.

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Posted in: 3. The Positive Money proposals

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