Individual banks create new money every time they make a new loan. Making a loan does not destroy the original depositers account balance. It does increase the lend-ee's account balance. After that lend-ee spends the money and it ends up in the hands of someone who wants to save it, you have 2 bank balances, at the same bank or at different ones. If at different ones, the original loan-originating bank can simply borrow from the other bank.
New loans are self funding, in the aggregate. The new savings needed to support the new loans, are created by those loans themselves. If holders of all the new money thereby created, all want to keep that extra new money in checking accounts or withdraw it in cash, then there is a Fed reserving requirement against the portion of it, they want in that form. Not all of it, just 10% of it.
But if they don't demand physical cash or a checking account balance, and instead prefer to hold a savings account balance, a CD, or an institutional money market balance, then there is no reserving requirement against the new money, at all. And as a result, no Fed action of any kind, is required to create new money this way.
And in fact, over the last 3 years, the Fed has not allowed M1 to expand at all, but commercial banks have been able to expand the broad money supply by $2 trillion, anyway.
As for Basel capital requirements, they are not 10 percent of all assets. Citicorp have 20 times as many assets as capital, and some banks have 33 times. The regulatory standard, as I keep telling you, is net worth (equity capital) equal to 4% of *risk adjusted* assets, and total capital (which includes long term debt, not just equity) must be equal to 8% of *risk adjusted* assets.
And what is the risk adjustment? For treasuries, the face value times *zero*. I.e. no reserves needed at all. For mortgage debt or any other debt secured by real property (e.g. aircraft leases, shipping loans), 15%, 25%, or 35% depending on its quality level. Meaning, for the middle figure, a bank can have 100 times as much of that stuff as it has share capital, and 50 times what it has capital and long term debt combined. For corporate debt and personal loans, no adjustment. Meaning 25 times equity for those.
A bank can move its mix of assets toward the treasury end, to support any degree of leverage, without breaking those capital standards.
It can also sell more debt to increase the second sort of capital, and more preferred or common to increase the first sort, without any net earnings. Or it can just let retained earnings increase the equity - often at double digit rates.
These are not meaningful restrictions on a bank's ability to create new broad money, precisely because it is nearly suicidally reckless to go as far as these standards allow. In practice, the better large banks pull in their horns when their tier 1 capital ratio falls below 8% - not 4%. But e.g. Citicorps current tier 1 ratio is 7.7% and its total capital is 11.2%, even with assets to tangible book in the 20 times range. Why? Because 30% of the assets are treasuries, requiring no reserves at all. And much of the rest is mortgages or agency mortgage backed, with 15% risk adjustments.
Notice, the capital requirement binds a bank's *asset mix*. The Fed reserve requirement binds, instead, a portion (only) of its *liability* mix (the portion of its liabilities that are checking account, demand deposits). The bank has wide discretion to move about in ways that relax either bind.
If the liability mix shifts toward loans from other banks or the money market, or issuance of commercial paper, or floating more bonds, or customers holding more CDs - then the second, liability side regulatory control eases. If the asset mix shifts toward governments and high rated mortgages, the asset side regulatory control eases. The same if it sells a new preferred stock issue.
Both sides of the balance sheet need to be actively managed. But on neither side, are the regs so tight that banks can't create new loans at will, when they think those loans are sound and will be repaid, and can be made at rates that cover their funding costs and running costs, and leave a profit.
Those considerations, and not either regulatory regime, govern the pace of expansion of bank balance sheets.
Frankly for the largest, the single reg that binds the most is the limit on the portion of all deposits in the hands of one institution. Citi at times, and both Bank of America and JP Morgan Chase now, bump up against those limits. And consequently seek further growth abroad, or from funding sources besides US deposits, including moving more heavily into Wall Street finance (securities issuance and purchase) rather than main street finance (deposit taking and loan origination). All pay large cash dividends (and some internal salary cost-bloat) to avoid growing faster than the whole economy. Because left on autopilot, they would.
No it cannot because there are accounting rules as to how many assets the bank is allowed to hold. Furthermore, the money is not fake. When I sold my house, I didn't get any old piece of paper. The other guy's bank put cash into the escrow account that got paid to me on closing. When I take out a car loan, the other guys car dealer got a check for cash moeny. That money eventually gets recyled into another real estate loan is the whole point of fractional reserve banking and how the banking system multiplies injected money.
Yes the entire derivatives world has created a set of off FED balance sheet IOU's that could be considered to constitute a private monetary arrangement. The whole system comes tumbling down every time simeone tries to turn any significant fraction of this mountain of IOUs into real cash, as has just been happening. In order to save the banking system the FED has actaully been monetizing some of this junk, expanding the money supply, but that is a voluntary act of the FED, not the banks that created the IOUs. If you read Volker's speach carefully you would have seen that he excoriated Bernanke for this.
My cat's pedigree is not money either though it has some value if it is a valuable cat. There is nothing that stops us from trading pedigrees as money. That does not expand the money supply. The day the FED purchases pedigrees in open market operations it would monetize the pedigrees.