7 ms·

This is how every bank works.

by traek 7y ago

politician 7y ago
Fractional reserve banking usually requires some non-zero percentage of deposits to be withheld.
- gridlockd 7y ago
  In virtually all developed nations, the requirement is either zero or single-digit percent.
  - benj111 7y ago
    zero? What happens when someone wants to make a withdrawal?
    - rtkwe 7y ago
      The operative word there is requirement. Banks in 0% reserve countries don't have to keep cash around but do to serve as their actual functions as banks.
      - benj111 7y ago
        What countries are we talking about here? As far as I'm aware most developed nations have capital requirements for the banks. Whilst maybe not stating a minimum % reserve, in practice they do need to keep reserves for those capital requirements.
        rtkwe 7y ago
        I don't know I was just answering your question about deposits.
    - stephen_g 7y ago
      Banks can borrow reserves from other banks or the lender or last resort. They usually do keep some reserves around for liquidity, but as little as possible because reserves don't make as much return just sitting in an exchange settlement account as they do if they lend them to other banks or buy Government bonds with them. Fractional reserve in general isn't really a thing in modern banking. The US still does have a reserve requirement but pretty much the rest of the world relies on capital adequacy ratios (some capital is usually stored as reserves in exchange settlement accounts but it doesn't have to be).
  - richardwhiuk 7y ago
    No there are strict tier 1 and tier 2 capital ratios that banks are required to uphold.
    - gridlockd 7y ago
      The fractional reserve requirements for cash and equivalent are in the single digits, as I said: https://en.wikipedia.org/wiki/Reserve_requirement#Required_reserves https://en.wikipedia.org/wiki/Reserve_requirement#Required_r... Tier 1 capital is not cash reserves, it's risk-adjusted assets, which may or may not be made up of assets that are as liquid as cash.
- wonder_er 7y ago
  The requirement is between zero percent and ten percent. [0] Basically, for assets less than $124 million, the reserve requirement is 3%. For more than $124 million, the requirement is 10%. In other words, for every $100 on deposit at a bank, it can create "out of thin air" $90 and loan it out. If someone then gets that $90 and puts it in a checking account at the bank, the bank can create and loan out $81, then $72, than $64, $57.6, $51 etc. [0] https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
TheRealPomax 7y ago
Yes, and banks are bound by incredibly tight laws, including laws around not being allowed to recirculate all the money you get as part of an exchange operation. If all the Libra association members are willing to be bound by the same laws, then cool: but do you trust Vodafone, or Facebook, or Andreessen Horowitz, to not try to bend the rules so they can make more money?
- drexlspivey 7y ago
  Banks follow fractional reserve so they have to keep 10-20% of the deposits in cash. Libra and most stablecoins keep 100% reserves so it's even stricter. Libra claims that every coin is backed by fiat currency so investing the deposits is not how they plan to make money off of this.
  - david-gpu 7y ago
    > investing the deposits is not how they plan to make money off of this. A huge float invested very conservatively still makes a lot of money. That is how most insurance companies actually profit.
  - greenshackle2 7y ago
    Where did you see that claim? I see a different claim on their website: """ How will the reserve be invested? Users of Libra do not receive a return from the reserve. The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions. Because the assets in the reserve are low risk and low yield, returns for early investors will only materialize if the network is successful and the reserve grows substantially in size. """ https://libra.org/en-US/about-currency-reserve/#the_reserve https://libra.org/en-US/about-currency-reserve/#the_reserve
  - cameldrv 7y ago
johnrgrace 7y ago
Except banking is highly regulated and the money not held in reserves is invested with oversight on how much risk is taken (that oversight fails sometimes but generally works). If a tech company can jump in and function as a bank without oversight that is going to hurt banks. History has shown us that unregulated banks, and regulated banks that push the limits or evade regulations fail and cause damage to the entire economic system.
- logfromblammo 7y ago
  Every time someone says "banking is highly regulated", a banking executive does not go to prison for breaking a banking regulation in a way that has quietly cost consumers hundreds of thousands of dollars in aggregate. I have no interest in protecting banks from businesses that act just like banks, and then get punished for doing those things, only because they are not legally considered banks. The last time banks pushed the limits, failed, and caused damage to the entire economic system, it was 2007-2009, and no one was ever held individually responsible for it. I haven't forgotten or forgiven. So yes, please. Hurt banks. Protecting them just turns them into privileged asses. The "tight regulations" function mainly as their cartel membership rules. Split tally sticks worked as privately-issued financial instruments for centuries, before banking lobbied to have them outlawed. Banking works better (for the banker) when there are no lawful alternatives to the bank's notes. A cryptographic equivalent to a split tally stick is very acceptable from a historic perspective.
- gridlockd 7y ago
  First of all, Facebook isn't doing fractional reserve. Secondly, banking regulation does nothing to mitigate the risk of fractional reserve banking. Your average bank holds maybe 10% of deposits, the rest is loans way into the future. No such bank can survive a bank run. What does mitigate the risk (for the average bank customers) is the government insurance for bank deposits. A government can always print the money necessary to bail out a failed bank. What such a bailout could do to a currency is another story. Let's just say we got lucky. In any event, the government wants the banks to loan out all this money, because that's economic stimulus. You can't have both tight regulations and easy money.
gridlockd 7y ago
Libra isn't doing fractional reserve, it's full reserve. If you want to do fractional reserve banking, you have to be a bank. Having said that, if you want to issue worthless tokens backed by nothing in exchange for real money, you can do that. That's your average initial coin offering. Laws still apply and you need to do due diligence, but it's possible.

This is how every bank works.

by traek 7y ago

This is how every bank works.

politician 7y ago

Fractional reserve banking usually requires some non-zero percentage of deposits to be withheld.

gridlockd 7y ago
In virtually all developed nations, the requirement is either zero or single-digit percent.
- benj111 7y ago
  zero? What happens when someone wants to make a withdrawal?
  - rtkwe 7y ago
    The operative word there is requirement. Banks in 0% reserve countries don't have to keep cash around but do to serve as their actual functions as banks.
    - benj111 7y ago
      What countries are we talking about here? As far as I'm aware most developed nations have capital requirements for the banks. Whilst maybe not stating a minimum % reserve, in practice they do need to keep reserves for those capital requirements.
      - rtkwe 7y ago
        I don't know I was just answering your question about deposits.
  - stephen_g 7y ago
    Banks can borrow reserves from other banks or the lender or last resort. They usually do keep some reserves around for liquidity, but as little as possible because reserves don't make as much return just sitting in an exchange settlement account as they do if they lend them to other banks or buy Government bonds with them. Fractional reserve in general isn't really a thing in modern banking. The US still does have a reserve requirement but pretty much the rest of the world relies on capital adequacy ratios (some capital is usually stored as reserves in exchange settlement accounts but it doesn't have to be).
- richardwhiuk 7y ago
  No there are strict tier 1 and tier 2 capital ratios that banks are required to uphold.
  - gridlockd 7y ago
    The fractional reserve requirements for cash and equivalent are in the single digits, as I said: https://en.wikipedia.org/wiki/Reserve_requirement#Required_reserves https://en.wikipedia.org/wiki/Reserve_requirement#Required_r... Tier 1 capital is not cash reserves, it's risk-adjusted assets, which may or may not be made up of assets that are as liquid as cash.
wonder_er 7y ago
The requirement is between zero percent and ten percent. [0] Basically, for assets less than $124 million, the reserve requirement is 3%. For more than $124 million, the requirement is 10%. In other words, for every $100 on deposit at a bank, it can create "out of thin air" $90 and loan it out. If someone then gets that $90 and puts it in a checking account at the bank, the bank can create and loan out $81, then $72, than $64, $57.6, $51 etc. [0] https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm

TheRealPomax 7y ago

Yes, and banks are bound by incredibly tight laws, including laws around not being allowed to recirculate all the money you get as part of an exchange operation. If all the Libra association members are willing to be bound by the same laws, then cool: but do you trust Vodafone, or Facebook, or Andreessen Horowitz, to not try to bend the rules so they can make more money?

drexlspivey 7y ago
Banks follow fractional reserve so they have to keep 10-20% of the deposits in cash. Libra and most stablecoins keep 100% reserves so it's even stricter. Libra claims that every coin is backed by fiat currency so investing the deposits is not how they plan to make money off of this.
- david-gpu 7y ago
  > investing the deposits is not how they plan to make money off of this. A huge float invested very conservatively still makes a lot of money. That is how most insurance companies actually profit.
- greenshackle2 7y ago
  Where did you see that claim? I see a different claim on their website: """ How will the reserve be invested? Users of Libra do not receive a return from the reserve. The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions. Because the assets in the reserve are low risk and low yield, returns for early investors will only materialize if the network is successful and the reserve grows substantially in size. """ https://libra.org/en-US/about-currency-reserve/#the_reserve https://libra.org/en-US/about-currency-reserve/#the_reserve
- cameldrv 7y ago

johnrgrace 7y ago

Except banking is highly regulated and the money not held in reserves is invested with oversight on how much risk is taken (that oversight fails sometimes but generally works). If a tech company can jump in and function as a bank without oversight that is going to hurt banks. History has shown us that unregulated banks, and regulated banks that push the limits or evade regulations fail and cause damage to the entire economic system.

logfromblammo 7y ago
Every time someone says "banking is highly regulated", a banking executive does not go to prison for breaking a banking regulation in a way that has quietly cost consumers hundreds of thousands of dollars in aggregate. I have no interest in protecting banks from businesses that act just like banks, and then get punished for doing those things, only because they are not legally considered banks. The last time banks pushed the limits, failed, and caused damage to the entire economic system, it was 2007-2009, and no one was ever held individually responsible for it. I haven't forgotten or forgiven. So yes, please. Hurt banks. Protecting them just turns them into privileged asses. The "tight regulations" function mainly as their cartel membership rules. Split tally sticks worked as privately-issued financial instruments for centuries, before banking lobbied to have them outlawed. Banking works better (for the banker) when there are no lawful alternatives to the bank's notes. A cryptographic equivalent to a split tally stick is very acceptable from a historic perspective.
gridlockd 7y ago
First of all, Facebook isn't doing fractional reserve. Secondly, banking regulation does nothing to mitigate the risk of fractional reserve banking. Your average bank holds maybe 10% of deposits, the rest is loans way into the future. No such bank can survive a bank run. What does mitigate the risk (for the average bank customers) is the government insurance for bank deposits. A government can always print the money necessary to bail out a failed bank. What such a bailout could do to a currency is another story. Let's just say we got lucky. In any event, the government wants the banks to loan out all this money, because that's economic stimulus. You can't have both tight regulations and easy money.

gridlockd 7y ago

Libra isn't doing fractional reserve, it's full reserve. If you want to do fractional reserve banking, you have to be a bank. Having said that, if you want to issue worthless tokens backed by nothing in exchange for real money, you can do that. That's your average initial coin offering. Laws still apply and you need to do due diligence, but it's possible.