If I understand your question right, there is always funds available to loan, as long as the bank meets legal requirements for reserves and capital. And as I understand it, even the reserve requirement is flexible as a bank can borrow reserves as long as they have good colateral (supposedly) to do so. Someone can correct me if I'm wrong.

When a new loan is taken out, new money is created at the stroke of the pen. The bank creates both a liability and a credit at the same time. New money is created out of nothing. As the loan principal is paid off (all at once or in installments), the principal extinguishes the money that was created. So as long as new loans are being lent at the same rate as they are being paid off, the effective money supply available to compete for goods remains the same. If more loans are being created than paid off (expanding credit or in other words debt levels) more money is being created than extinguished so the effective money supply increases. If credit is being paid off or defaulted on faster than new loans are made, the effective money supply contracts and there is less money circulating to purchase goods.

The banks profit from interest, assuming they do not pay it out to management or as dividends, adds to their capital levels. If capital is the limiting factor that limits the banks lending ability, then the increased capital would allow the bank to increase its loan "book" if there were lending opportunities available. From what I am learning, reserves are rarely if ever a limiting factor as far as bank loans. Capital certainly can be, because the banks capital is what it has as a reserve to be able to meet obligations should a bank have a number of bad loans. Loan losses come out of the banks capital.

When a bank loans out money (a deposit bank), they get to create the money out of nothing. But the loan principal amount has to be satisfied and extinguished. Normally the loan customer pays off the loan and that does the trick. But if the customer can not pay and defaults, the bank has to make up the shortfall out of its own money. They can't just make up new money to replace it. That is how banks can go broke rather quickly. If they are operating at very low capital levels (say 5%), it does not take too many bad loans for the losses to eat up the banks capital and the bank go bankrupt because their liabilities (deposits among other things) exceed their assets. That is why I call banks the ultimate leverage bet. Their entire lending model is based around leverage. When banking times are good, profits are great, but when loans start going sour...................... that is where the FDIC comes in when the bank goes belly up.

John