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.
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.
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.
This means in effect that they can use all of the funds deposited with them to on-lend to their borrowers.
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.
It is for the individual bank to ensure that it does not on-lend money to borrowers who cannot repay it.