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Bank reserve ratios [1] operate as a percentage, so by creating more bank reserves, you create more money that can be lent out. Say that the reserve ratios req

Bank reserve ratios [1] operate as a percentage, so by creating more bank reserves, you create more money that can be lent out. Say that the reserve ratios requirement is 10%, which it currently is. Then for every dollar it has in reserves, the bank may create $10 in loans. The bank reserves don't themselves circulate as money, but they let the bank create more credit, which does circulate as money. [1] https://www.investopedia.com/terms/r/reserveratio.asp https://www.investopedia.com/terms/r/reserveratio.asp

jbverschoor 6y ago
The reserve requirements are 0% as of earlier this year. https://www.forbes.com/sites/bobhaber/2020/03/16/the-fed-fires-the-big-one/#719d42f96aa8 https://www.forbes.com/sites/bobhaber/2020/03/16/the-fed-fir... 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...
- neffy 6y ago
  And as it happens everything is regulated by bank capital and the Basel framework these days, rather than the old gold standard of asset reserves. OP gave the correct textbook description - but that description has been superceded by changes in bank regulation since the 1980's.
RobertoG 6y ago
Actually, that it's not how it works in practice. The credit department of a bank, doesn't check if the bank have enough reserves before lending. They only check if the new lending make senses from a business perspective. If it does, it concede the credit to the customer. The bank is legally obliged to have the reserves, so, a posteriori (and not before) the bank will try to get the reserves in the inter-bank market (from other banks). If there are not enough reserves in the system the price of the reserves will go up. That's the interest rate. Central banks don't target the quantity of reserves, they only care about the interest rate. So, if they want to keep the interest rate in their target, they have to create new reserves. So, it's the lending what create reserves, not the other way around. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... http://bilbo.economicoutlook.net/blog/?p=6617 http://bilbo.economicoutlook.net/blog/?p=6617 http://bilbo.economicoutlook.net/blog/?p=14620 http://bilbo.economicoutlook.net/blog/?p=14620
deleted 6y ago
[deleted]
throw0101a 6y ago
> Bank reserve ratios [1] For the record, reserve requirements are not universal. Canada, for one, eliminate theirs in 1992: * https://en.wikipedia.org/wiki/Reserve_requirement#Canada https://en.wikipedia.org/wiki/Reserve_requirement#Canada The main thing limiting how much Canadian banks can lend out would be to remain profitable: too many loans, to too many bad investment ideas, means losses.
- jganetsk 6y ago
  > For the record, reserve requirements are not universal. Canada, for one, eliminate theirs in 1992: Yes! This! In fact, not only does the Canadian system have zero reserve requirements... it has near zero reserves. https://en.wikipedia.org/wiki/Large_Value_Transfer_System https://en.wikipedia.org/wiki/Large_Value_Transfer_System How it works is this: - Banks send payments in real time. The system does not involve any transfer of assets, but it does require pledging collateral (often government debt). Asset transfers occur outside of the system. For example, if bank A sells a government debt instrument to bank B, then bank B sends a payment to bank A in the system, and then A transfers the instrument to B outside of this system. - At the end of each day, settlement is done. Each private bank has a net balance at the end of the day. The net balances sum up to zero across the system, and post-settlement, each individual bank must have a net zero balance. In order to do so, they can either send/receive payments from/to another private bank for overnight loans. Or they can deal with the central bank, by having their reserve balance credited/debited, or by getting an overnight loan from the central bank at a rate determined by the central bank. With overnight loans, no assets are transferred... there's just a promise to pay back the next day via sending a payment. A few notable things about reserves in the system: - Use of reserves is totally optional. In practice, banks hold very little reserves. - The quantity of reserves is entirely determined by demand from private banks. - Reserves are never transferred from one private bank to another. They are only transferred between central bank and private bank.

jbverschoor 6y ago

The reserve requirements are 0% as of earlier this year. https://www.forbes.com/sites/bobhaber/2020/03/16/the-fed-fires-the-big-one/#719d42f96aa8 https://www.forbes.com/sites/bobhaber/2020/03/16/the-fed-fir... 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...

neffy 6y ago
And as it happens everything is regulated by bank capital and the Basel framework these days, rather than the old gold standard of asset reserves. OP gave the correct textbook description - but that description has been superceded by changes in bank regulation since the 1980's.

RobertoG 6y ago

Actually, that it's not how it works in practice. The credit department of a bank, doesn't check if the bank have enough reserves before lending. They only check if the new lending make senses from a business perspective. If it does, it concede the credit to the customer. The bank is legally obliged to have the reserves, so, a posteriori (and not before) the bank will try to get the reserves in the inter-bank market (from other banks). If there are not enough reserves in the system the price of the reserves will go up. That's the interest rate. Central banks don't target the quantity of reserves, they only care about the interest rate. So, if they want to keep the interest rate in their target, they have to create new reserves. So, it's the lending what create reserves, not the other way around. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... http://bilbo.economicoutlook.net/blog/?p=6617 http://bilbo.economicoutlook.net/blog/?p=6617 http://bilbo.economicoutlook.net/blog/?p=14620 http://bilbo.economicoutlook.net/blog/?p=14620

deleted 6y ago

[deleted]

throw0101a 6y ago

> Bank reserve ratios [1] For the record, reserve requirements are not universal. Canada, for one, eliminate theirs in 1992: * https://en.wikipedia.org/wiki/Reserve_requirement#Canada https://en.wikipedia.org/wiki/Reserve_requirement#Canada The main thing limiting how much Canadian banks can lend out would be to remain profitable: too many loans, to too many bad investment ideas, means losses.

jganetsk 6y ago
> For the record, reserve requirements are not universal. Canada, for one, eliminate theirs in 1992: Yes! This! In fact, not only does the Canadian system have zero reserve requirements... it has near zero reserves. https://en.wikipedia.org/wiki/Large_Value_Transfer_System https://en.wikipedia.org/wiki/Large_Value_Transfer_System How it works is this: - Banks send payments in real time. The system does not involve any transfer of assets, but it does require pledging collateral (often government debt). Asset transfers occur outside of the system. For example, if bank A sells a government debt instrument to bank B, then bank B sends a payment to bank A in the system, and then A transfers the instrument to B outside of this system. - At the end of each day, settlement is done. Each private bank has a net balance at the end of the day. The net balances sum up to zero across the system, and post-settlement, each individual bank must have a net zero balance. In order to do so, they can either send/receive payments from/to another private bank for overnight loans. Or they can deal with the central bank, by having their reserve balance credited/debited, or by getting an overnight loan from the central bank at a rate determined by the central bank. With overnight loans, no assets are transferred... there's just a promise to pay back the next day via sending a payment. A few notable things about reserves in the system: - Use of reserves is totally optional. In practice, banks hold very little reserves. - The quantity of reserves is entirely determined by demand from private banks. - Reserves are never transferred from one private bank to another. They are only transferred between central bank and private bank.