It is for the individual bank to ensure that it does not on-lend money to borrowers who cannot repay it.
This high level of confidence on the capital markets enables it to take up loans under favourable conditions and to on-lend at accordingly favourable rates.
This means in effect that they can use all of the funds deposited with them to on-lend to their borrowers.
The extreme case arises if someone can borrow and then on-lend in other markets at even higher rates, in which case there is art explosion of credit.
Moreover, it is hard to see how the banks could maintain their deposit-taking services if deprived of the ability to on-lend the funds which flow in.
An extreme case arises if someone can borrow and then on-lend in other markets at even higher rates, in which case there is an explosion of credit.
