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I don't think I agree with your definition of "robust" in this context. A bank that only writes loans and doesn't have deposits must be lending out its own asse

I don't think I agree with your definition of "robust" in this context. A bank that only writes loans and doesn't have deposits must be lending out its own assets. In that case, they don't have a reserve, because the assets they're using to back their loans aren't liabilities, and aren't subject to runs. The reserve ratio is there precisely because banks are loaning out deposits, and deposits are liabilities. If a crisis comes, there can be a run on the bank, and all of a sudden the bank is insolvent. So a bank that's only writing loans and not taking deposits (if you can call it a bank at all; it's really more of a hedge fund) is in some ways more "robust" than a traditional bank that's lending out its deposits.

neffy 6y ago
The reserve ratio (which in most places is now down to 2% or less), is there to prevent runaway monetary expansion through lending/deposit creation. The Central Bank's role as lender of last resort is the backup for bank runs. In the event of a run, a bank is considered illiquid, an insolvent bank is one where losses on debts exceed loss provisions and capital. An entity that only wrote loans, and didn't have deposits would not be a bank - the definition of a bank is implicitly that it is performing fractional reserve banking via double entry book keeping. (Unless it's the World Bank, which is actually a fund, because the US and UK had an argument about who would control the International Monetary Fund (which is actually a bank) when the Bretton Woods agreement was setup. No banks, including central banks can really be described as robust. They have at best around 1% fault tolerance in terms of the quantity of loans as a percentage of total lending that they can write-off each year. Yes, that is about to become a huge problem.
- nendroid 6y ago
  The reserve ratio is currently zero percent. https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone...
- atq2119 6y ago
  The reserve ratio is mostly a historical relic and is zero in many places, yet those places don't see an infinite amount of money. This indicates that the traditional story of how fractional reserve banking causes money growth is wrong. In reality, even a non-zero reserve ratio doesn't limit money creation if you look at the financial system as a whole, because the created money will simply become deposits elsewhere. The true limiter of money creation is capital constraints: somebody must give money to the bank and be willing to lose it - only then is the bank allowed to make loans.
  - neffy 6y ago
    It's not wrong, it's incomplete since Basel regulation was introduced. (Although the Keynsian description you will still find in most textbooks is wrong, but that's another rabbit hole). The two issue's with non-zero reserve regulation were (historically) the price of gold was implicitly linked to deposit expansion, and in the Bretton Woods era, all the countries had different expansion rates. Then post Bretton Woods, Basel comes in. With Basel the Bank's risk weighted capital also regulates the amount of lending, and hence deposit expansion.

neffy 6y ago

The reserve ratio (which in most places is now down to 2% or less), is there to prevent runaway monetary expansion through lending/deposit creation. The Central Bank's role as lender of last resort is the backup for bank runs. In the event of a run, a bank is considered illiquid, an insolvent bank is one where losses on debts exceed loss provisions and capital. An entity that only wrote loans, and didn't have deposits would not be a bank - the definition of a bank is implicitly that it is performing fractional reserve banking via double entry book keeping. (Unless it's the World Bank, which is actually a fund, because the US and UK had an argument about who would control the International Monetary Fund (which is actually a bank) when the Bretton Woods agreement was setup. No banks, including central banks can really be described as robust. They have at best around 1% fault tolerance in terms of the quantity of loans as a percentage of total lending that they can write-off each year. Yes, that is about to become a huge problem.

nendroid 6y ago
The reserve ratio is currently zero percent. https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone...
atq2119 6y ago
The reserve ratio is mostly a historical relic and is zero in many places, yet those places don't see an infinite amount of money. This indicates that the traditional story of how fractional reserve banking causes money growth is wrong. In reality, even a non-zero reserve ratio doesn't limit money creation if you look at the financial system as a whole, because the created money will simply become deposits elsewhere. The true limiter of money creation is capital constraints: somebody must give money to the bank and be willing to lose it - only then is the bank allowed to make loans.
- neffy 6y ago
  It's not wrong, it's incomplete since Basel regulation was introduced. (Although the Keynsian description you will still find in most textbooks is wrong, but that's another rabbit hole). The two issue's with non-zero reserve regulation were (historically) the price of gold was implicitly linked to deposit expansion, and in the Bretton Woods era, all the countries had different expansion rates. Then post Bretton Woods, Basel comes in. With Basel the Bank's risk weighted capital also regulates the amount of lending, and hence deposit expansion.