A reader asked that question today. To those unfamiliar with the answer, it might seem shocking: Nobody's.

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Q: "I am a bank and I make loans. Whose money am I lending?" 
A: Nobody's

You are creating new money. Lending creates money out of nothing, and that money is deposited somewhere, creating deposits. 

Check out the following chart.

Total Credit Owed vs Base Money

Total Credit vs Base Money, data from St. Louis Fed, chart by Mish

Total credit owed exceeds $90 trillion. Base money is just over $6 trillion.

The Federal Reserve defines the Monetary Base as "The sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve)." 

Bank Reserves

Bank reserves were 3.3 trillion as of the end of May. 

They are a function of QE. 

Via QE, the Fed shoved money down the banks' throats which the banks park back at the Fed an collect interest.

Hooray, Free Money

The Fed pays interest on all reserves. At the end of May, the total reserves were $3.318 trillion.

The Federal Reserve currently pays 1.65% interest on reserves IOR.

If the Fed hikes to the range of 2.25-2.50 percent in July as expected, then expect IOR to jump to approximately 2.40 percent.

Q: On an annual basis, how much free money are we talking about?
A: 2.40 percent of $3.318 trillion is $79.63 billion!

Q: We are giving banks $79.63 billion in free money?
A: It's a moving target.

The IOR keeps rising but the reserve balances keep declining.

That $79.63 billion reflects a hike that has not taken place yet. If the Fed keeps hiking at a pace that exceeds QT, then the amount will rise further. If not, the actual amount of free money will drop.

Constraints on Bank Lending

1: Bank cannot be capital impaired (too many bad loans)

2: People or corporations want to borrow

3: The bank has to think the loan will be paid back (believe the customer is a good credit risk)

The bank may very well be wrong about point number 3, but it will give a loan if it believes the customer is a good risk (or that the asset value will rise if the customer defaults)

Think about point 3 and the housing crisis. Banks knew damn well they were doing liar loans, but they did not foresee a housing price crash or people walking away from homes

Bank lending creates money that did not exist before. To the extent that any "reserves" are needed, the Fed can manufacture them at will and then some via QE as the above chart shows.

Banks used to collect free money on "excess reserves" now it's "reserves"

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