I was just reading this article one the BBC about the Treasury Committee blaming the FSA for Northern Rock’s unsustainable business model when I came across this statement:

Unlike the great majority of UK banks, Northern Rock relied upon borrowing funds from the wholesale money markets to fund its mortgage business, rather than the usual method of using savers’ deposits.

Surely the BBC’s Business editors can’t be so naive as to not understand that the greatest majority of mortgage lending in the Western World is funded by fractional reserve banking.

Fractional-reserve banking refers to a financial system where the bank uses a fraction of its deposits to finance borrowers ie: It does not have the money as deposits to give out as loans. It ‘creates’ the money for the loan by starting a line on a ledger or in a database. The money is ‘created’ on the promise of the loan’s repayment.

Now, I can understand “Joe Bloggs” on the street believing that mortgages are only lent from deposits. After all, the banks do seem to spend some time and effort supporting this myth. However, I’d imaging that a great many people in business and finance circles are fully aware that mortgages are almost entirely funded by fractional reserve banking these days.

This begs the queston; why are the BBC business editors propagating a myth about banking which plainly isn’t true? Are the business editors really this naive?