5 ms·

Not only that but they've removed the reserve requirements entirely for "thousands" of banks. There are only ~4500 commercial banks in the USA total. So that's

Not only that but they've removed the reserve requirements entirely for "thousands" of banks. There are only ~4500 commercial banks in the USA total. So that's at least a good fraction of them. These banks can now create money out of nothing as much as they want.

mandelbrotwurst 7y ago
Do you have a source for this? That doesn't appear to be the case at least according to the Fed's website (https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm ), which shows the most recent change to the requirements being in January - setting it at 3% for large banks.
- superkuh 7y ago
  Sorry. I should have included that. https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-to-zero-and-launches-massive-700-billion-quantitative-easing-program.html https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-t... Start of paragraph 4.
  - mandelbrotwurst 7y ago
    Thanks.
- vpribish 7y ago
  https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... last item, heading is "Reserve Requirements" "... the Board has reduced reserve requirement ratios to zero percent effective on March 26"
jganetsk 7y ago
Reserve requirements never really limited the ability of banks to create money. Canada hasn't had reserve requirements for >20 years. Neither does the UK, New Zealand, Australia, Sweden and Hong Kong. But all banks are indeed subject to capital requirements, and that does limit money creation Anyway, reserve requirements are generally not effective, including in the USA. Much has been written about this. Banks are usually not reserve constrained (especially post QE), there are many ways to game reserve requirements, there are many ways to get reserves when you need them, and central banks increase reserves systematically when they are in demand via interest rate mechanisms. [1] https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_... [2] https://en.wikipedia.org/wiki/Basel_III https://en.wikipedia.org/wiki/Basel_III [3] http://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_8_14_13.pdf http://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_... [4] http://bilbo.economicoutlook.net/blog/?p=9075 http://bilbo.economicoutlook.net/blog/?p=9075 [5] http://macromusings.libsyn.com/marc-lavoie-on-canadian-central-bank-policy-real-time-payments-and-the-post-keynesian-tradition http://macromusings.libsyn.com/marc-lavoie-on-canadian-centr...
- Lazare 7y ago
  Very good answer!
- webninja 7y ago
  Reserve requirement were at 10%. What happens now if someone deposits $100,000, the bank lends out $100k because it can, and the someone tries to withdraw their money?
  - jganetsk 7y ago
    > Reserve requirement were at 10%. This is very simplistic. 10% of what? Checking account deposits? Savings account deposits? If savings and checking accounts have different reserve requirements (and afaik they do), then depositors just moving money back and forth between different kinds of accounts can change the bank's required reserves. Banks also have flexibility on how they report their accounts. Furthermore, the reserve requirement is enforced across a 2 week period. Banks don't need to have all the required reserves all the time, just some of the time. And what if they don't meet the requirement? Is it that they are forced to close by regulators, or do they just pay a penalty? If it's the latter, then how often in practice do banks actually meet their requirements? Because it might be cheaper to pay the penalty than to meet the requirement. > What happens now if someone deposits $100,000, the bank lends out $100k because it can, and the someone tries to withdraw their money? No one's doubting that banks need cash on hand to meet the demands of their depositors, and that they need assets to use for net settlement with other banks. But cash demand on any given day is probably much lower than 10% of deposits (and afaik, the reserve requirements don't expect banks to hold anywhere near 10% of deposits in cash). As for inter-bank settlement, there are a lot of ways to get sufficient liquidity, including borrowing on the repo market and the overnight market. Holding reserves costs banks opportunity-cost (because they only earn interest-on-reserves, which for most of US history was 0). And there is no shortage of safe, liquid assets out there (US government debt). Even mortgage debt is liquid. And there are tons of reserves sloshing around there, due to QE. So banks are definitely not reserve constrained... not even close. But banks might be capital constrained. There's a big difference between reserve requirements and capital requirements. But in many cases, banks might be constrained by neither. They are probably constrained by a lack of demand from lenders. There are not enough people to lend to.
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LeoTinnitus 7y ago
That is also contingent upon state policy as well. It's kinda weird but in my state, WI, State law trumps federal law because our state laws are more stringent. It has something to do with our laws being grandfathered in before the federal government ever did anything about commercial lending.

mandelbrotwurst 7y ago

Do you have a source for this? That doesn't appear to be the case at least according to the Fed's website (https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm ), which shows the most recent change to the requirements being in January - setting it at 3% for large banks.

superkuh 7y ago
Sorry. I should have included that. https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-to-zero-and-launches-massive-700-billion-quantitative-easing-program.html https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-t... Start of paragraph 4.
- mandelbrotwurst 7y ago
  Thanks.
vpribish 7y ago
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... last item, heading is "Reserve Requirements" "... the Board has reduced reserve requirement ratios to zero percent effective on March 26"

jganetsk 7y ago

Reserve requirements never really limited the ability of banks to create money. Canada hasn't had reserve requirements for >20 years. Neither does the UK, New Zealand, Australia, Sweden and Hong Kong. But all banks are indeed subject to capital requirements, and that does limit money creation Anyway, reserve requirements are generally not effective, including in the USA. Much has been written about this. Banks are usually not reserve constrained (especially post QE), there are many ways to game reserve requirements, there are many ways to get reserves when you need them, and central banks increase reserves systematically when they are in demand via interest rate mechanisms. [1] https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_... [2] https://en.wikipedia.org/wiki/Basel_III https://en.wikipedia.org/wiki/Basel_III [3] http://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_8_14_13.pdf http://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_... [4] http://bilbo.economicoutlook.net/blog/?p=9075 http://bilbo.economicoutlook.net/blog/?p=9075 [5] http://macromusings.libsyn.com/marc-lavoie-on-canadian-central-bank-policy-real-time-payments-and-the-post-keynesian-tradition http://macromusings.libsyn.com/marc-lavoie-on-canadian-centr...

Lazare 7y ago
Very good answer!
webninja 7y ago
Reserve requirement were at 10%. What happens now if someone deposits $100,000, the bank lends out $100k because it can, and the someone tries to withdraw their money?
- jganetsk 7y ago
  > Reserve requirement were at 10%. This is very simplistic. 10% of what? Checking account deposits? Savings account deposits? If savings and checking accounts have different reserve requirements (and afaik they do), then depositors just moving money back and forth between different kinds of accounts can change the bank's required reserves. Banks also have flexibility on how they report their accounts. Furthermore, the reserve requirement is enforced across a 2 week period. Banks don't need to have all the required reserves all the time, just some of the time. And what if they don't meet the requirement? Is it that they are forced to close by regulators, or do they just pay a penalty? If it's the latter, then how often in practice do banks actually meet their requirements? Because it might be cheaper to pay the penalty than to meet the requirement. > What happens now if someone deposits $100,000, the bank lends out $100k because it can, and the someone tries to withdraw their money? No one's doubting that banks need cash on hand to meet the demands of their depositors, and that they need assets to use for net settlement with other banks. But cash demand on any given day is probably much lower than 10% of deposits (and afaik, the reserve requirements don't expect banks to hold anywhere near 10% of deposits in cash). As for inter-bank settlement, there are a lot of ways to get sufficient liquidity, including borrowing on the repo market and the overnight market. Holding reserves costs banks opportunity-cost (because they only earn interest-on-reserves, which for most of US history was 0). And there is no shortage of safe, liquid assets out there (US government debt). Even mortgage debt is liquid. And there are tons of reserves sloshing around there, due to QE. So banks are definitely not reserve constrained... not even close. But banks might be capital constrained. There's a big difference between reserve requirements and capital requirements. But in many cases, banks might be constrained by neither. They are probably constrained by a lack of demand from lenders. There are not enough people to lend to.

deleted 7y ago

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deleted 7y ago

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LeoTinnitus 7y ago

That is also contingent upon state policy as well. It's kinda weird but in my state, WI, State law trumps federal law because our state laws are more stringent. It has something to do with our laws being grandfathered in before the federal government ever did anything about commercial lending.