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5:00Basel Capital Rules: Why Banks Can't Lend Infinitely
A bank takes your £1,000 deposit and lends out £900 of it, then the borrower deposits it, and the bank lends again. So what stops the music? Not the deposits, the bank's own capital, and a rulebook that prices every loan by how risky it is.
Banks fund loans mostly with other people's money, deposits and borrowing. The thin slice of the bank's *own* money, its capital, is the loss-absorbing cushion that stands between a bad loan and a depositor losing their savings. The Basel rules (set by the Basel Committee on Banking Supervision at the BIS, implemented locally by regulators like the PRA in the UK and the federal banking agencies in the US) cap how much a bank can lend by tying it to how much capital it holds. That is *why* a bank can't lend infinitely: every new loan demands a matching sliver of capital.
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