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> Reserve requirement were at 10%. This is very simplistic. 10% of what? Checking account deposits? Savings account deposits? If savings and checking accounts
by 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.