What is typically a limiting factor for how much money banks can loan out?

The amount of money banks can loan out is primarily constrained by the legal reserves they are required to hold. This requirement, set by regulatory authorities, mandates that banks maintain a certain percentage of deposits as reserves. These reserves are kept to ensure that banks have enough liquidity to meet withdrawal demands and other obligations.

When banks receive deposits, a portion must be held back as reserves, which limits the amount available for lending. For example, if a bank has a reserve requirement of 10%, it can only lend out 90% of its deposits. This regulatory framework is essential to maintain financial stability in the banking system and prevent excessive risk-taking by banks.

The other options, while they may influence lending in various ways, do not serve as the fundamental limit on how much money banks can loan out. The number of applications received can indicate demand but does not affect the legal capacity for lending. Interest rates set by consumers reflect the cost of borrowing rather than a limit on available funds. Economic demand for loans can affect how actively banks lend, but again, it does not act as a structural limit imposed like reserve requirements do.