Figure 1. A stylised example of a b

Figure 1. A stylised example of a bank’s lending capacity if the size of potential outflows of deposits is 10 per centA bank’s lending capacity can be also expressed as a multiple of its liquidity reserve. For the bank in Figure 1, the lending capacity would be 10 meaning the bank can lend out 10times its liquidity reserve. When the lending capacity is expressed as a multiple of the bank’s liquidity reserve, the only remaining parameter that determines the bank’s lending capacity is the size of potential outflows.As illustrated in Figure 2, banks’ lending capacity increases (decreases) exponentially as the size of potential outflows decreases (increases). When the size of potential outflows is below 5 per cent, banks’ lending capacity is at least 20 times their liquidity reserves.When the size of potential outflows is between 5 and 10 per cent, banks’ lending capacity is between 10 to 20 times their liquidity reserves. As the size of potential outflows approaches 100 per cent, banks’ lending capacity reaches one. This case corresponds to a situation where banks lend out cash, but none of this cash ever returns to banks in the form of saving deposits.7 We return to this case in the next section.