> If I am mistaken please correct me with citations but respectfully, I believe your understanding is incorrect.

You are mistaken, citation: me working in bank on stuff related to this, and generally needing to be aware of capital requirements etc.

> For example, when you are issued a new car loan from a bank, those funds do not come from another depositor.

Sort of, depends on what level of abstraction your working at. Inside the banks ledger this is entirely true, however this doesn’t create new M1 money [1], only M2 money [2]. Just because the bank can write a number into a database, doesn’t mean they can actually materialise it. That would be money printing, also known as forgery, unless you happen to be a reserve bank with the right to print money [3].

So banks ledger might have more money in it, that ledger is banked by a reserve account at a federal reserve bank (where banks keep their money), and that account doesn't have more money in it. Which is important, because that’s the account the bank will ultimately use to settle payments such as ACH, Debit/Credit card, Fed Express etc.

So while the bank can “create” money in it ledger, it can’t be moved or spent because it can’t create money in its reserve account, so it can’t settle payments. Hence the bank can’t materialise the money it’s “created”.

However this inability to materialise the “created” money isn’t important, as long as they have customer deposits on hand to cover all of the outgoing payments. The “created” money and “real” money all sit in one big pot (the banks ledger), and as long as you don’t try to withdraw an amount larger than the “real” money, you can pretend it’s all “real” money.

The reserve ratio sets the limit on how many $ of “real” money a bank must have for each $ of money it “creates”. That ratio breaks down a little bit a 0%, because it suggests that a bank with no customer deposits can still lend. But the fact that bank with no deposits can legally issue loans doesn’t change the fact it can’t physically issue them. It literally doesn’t have the cash to give out. So they could lend you money, and you could pay interest on loan, but you would never be able to withdraw the money as cash, or spend it using a card, or transfer it elsewhere. So, yes, technically the loan can exist, and technically a bank can lend without customer deposits. But no one in their right mind would ever borrow money that couldn’t be spent or transacted with. Kinda defeats the point of borrowing the money.

We can also show this must be true, because if it wasn’t, it means that every bank in the US issuing loans effectively an unregulated licence to print money. If that was true, why bother lending it? Banks lend money in the hopes of making money. If they can legally print money, then why don’t they just print their own money and profit margin. No need to mess around find people to lend to, then having do credit checks and collections. They could cut the middle man out, and print cash straight into their pockets.

> If it were not for the free money creation feature of the banks, then banks would have to lend customer funds or their own reserves.

They do lend out of their customer deposits.

> The risk and cost of lending these real assets would greatly exceed the ultra-low interest rate environment we currently experience and the cheap credit days would be over.

I think you grossly over estimate the risk of lending money, even at low interest rates. Most of the extremely low interest lending is securitised, so if the borrower goes bust, the bank can claim a physical asset (like a house, or an office or a factory) to recover borrowed money. In these situations the biggest loss a bank suffers is that the loan is paid back quicker, and thus they earn less interest, and selling a factory is a pain in the arse to manage.

For most consumer lending, like credit cards etc, the interest rates are stupidly high, and the products are designed to milk consumers over many years. Keeping them stuck in a cycle of debt they struggle to escape from, and ensuring a steady supply of payments to the bank. Also ask yourself, if lending is risk free to the banks, why isn’t everyone offering 0% interest loans, and why do credit agencies exist?

> The fraud involved in fractional reserve lending is that the lender has no cost of funds. They are not risking their own assets and are therefore more willing to lend cheaply.

Again, if this was true, why would any of the banks bother lending to anyone? They could just issue themselves a trillion dollar loan at 0% to be paid back in 1000 years, the buy a yacht and retire. Why the hell would they voluntarily subject themselves to the of actually lending money to other people, then have to try and chase them down for repayment?

[1]: https://www.investopedia.com/terms/m/m1.asp
[2]: https://www.investopedia.com/terms/m/m2.asp
[3]: https://www.investopedia.com/ask/answers/082515/who-decides-...