Page "Arbitrage" Paragraph 65

Suppose the bank sells its IT installations for 40 million USD.

With a reserve ratio of 10 %, the bank can create 400 million USD in additional loans ( there is a time lag, and the bank has to expect to recover the loaned money back into its books ).

The bank can often lend ( and securitize the loan ) to the IT services company to cover the acquisition cost of the IT installations.

This can be at preferential rates, as the sole client using the IT installation is the bank.

If the bank can generate 5 % interest margin on the 400 million of new loans, the bank will increase interest revenues by 20 million.

The IT services company is free to leverage their balance sheet as aggressively as they and their banker agree to.

This is the reason behind the trend towards outsourcing in the financial sector.

Without this money creation benefit, it is actually more expensive to outsource the IT operations as the outsourcing adds a layer of management and increases overhead.