4 ms·

Aren’t banks only required to hold 2% in cash of their clients’ balance? It seems like this scam is not new.

by baby 5y ago

onethought 5y ago
They have government backing to issue new money (in the form of debt). That’s quite different when you remove the government backing.
- baby 5y ago
  It took a few bank runs to get there though. The government backing is also 50/50.
  - onethought 5y ago
    Are you talking about a specific country? My point was only to point out the very material difference in having a producer of a currency back the production. In Crypto the miners cannot suddenly issue more currency, meaning there is an inherent risk of capital grid-lock. I get this is a trade off for the other benefits of crypto but it's one people should be aware of, and why you can't treat it the same way... or rely on it the same way.
- imtringued 5y ago
  One of the weird parts of fiat banking is that a public institution is almost 100% privatized. This is fine during normal times but during crisis it doesn't work because we want to keep the public institution part alive, which involves saving the private companies that caused the problem.
  - jkhdigital 5y ago
    Banking has never been a public institution. Even now the Federal Reserve System is not, in fact, a public entity. It is chartered by the federal government but does whatever it wants within that charter. There are no elected officials at the Fed.
    - bumby 5y ago
      Having elected officials is not what constitutes a public institution. CFR 417.201 defines a public institution as “an institution that is operated by or controlled by the Federal government, a State, or a political subdivision of a State such as a city or county.” For example, as you stated the government sets the Fed charter and thus enumerates their powers and duties. Congress also pays their salaries, so (to a very limited extent) the Fed receives government funding to operate and reports to Congress for accountability. Most federal “public institutions” do not have elected officials, but rather are led by appointees, just like the Fed.
notahacker 5y ago
Banks hold repayable loans which earn them profit instead of printing what they want and lying about backing...
- baby 5y ago
  You know the 2008 crisis is still fresh in a lot of people’s memory right?
  - notahacker 5y ago
    The 2008 crisis was the banks losing their assets, not the banks lying about their assets. Though yes, it amuses me to see crypto advocates' reaction to 2008 was to enthusiastically defend the right of crypto companies to do worse whilst pretending not to.
    - cartoonworld 5y ago
      Didn't the banks lose their assets because of (among other things) the repackaging of mortgages with fraudulent ratings into mislabeled securities, resold as a higher value note?
      - imtringued 5y ago
        Yes but how does crypto solve this problem? Letting people borrow money isn't a flaw in our banking system. The lack of due diligence is.
        cartoonworld 5y ago
        That's true, but at least programmatic securities for all its pitfalls and possibly bugs, is likely to do what it says on the tin.
  - peakaboo 5y ago
    Not to mention there are quite a few people seeing the same signs of a crash now as in 2008.
LatteLazy 5y ago
In a word, no. Banks are required to more in assets than they have in client liability, and to write down the value of those assets based on risk. So they have >100% coverage.
- runeks 5y ago
  Good point. However, OP specifically said “cash”, not assets in general.
  - LatteLazy 5y ago
    Thats fair, though I don't think anyone is holding cash exactly equal to their liabilities. Tether certainly aren't, they make money by investing the revenue they receive if I understand the "claims" correctly...
- jkhdigital 5y ago
  I think he means capital coverage, which is roughly 5% under the current regulatory scheme. That is, every dollar in liabilities must be covered by at least 5 cents of bank capital.
deleted 5y ago
[deleted]
pjc50 5y ago
This is a mangled version of Basel 3 requirements: https://voxeu.org/article/how-much-equity-capital-should-uk-banks-have https://voxeu.org/article/how-much-equity-capital-should-uk-... Very little of this is "cash" in the physical sense, it's more about how much the bank can absorb losses through selling various tiers of asset as well as through its own share capital.
plebianRube 5y ago
It is presently 0% as of March 2020 https://www.investopedia.com/terms/r/requiredreserves.asp https://www.investopedia.com/terms/r/requiredreserves.asp

Aren’t banks only required to hold 2% in cash of their clients’ balance? It seems like this scam is not new.

by baby 5y ago

Aren’t banks only required to hold 2% in cash of their clients’ balance? It seems like this scam is not new.

They have government backing to issue new money (in the form of debt). That’s quite different when you remove the government backing.

baby 5y ago
It took a few bank runs to get there though. The government backing is also 50/50.
- onethought 5y ago
  Are you talking about a specific country? My point was only to point out the very material difference in having a producer of a currency back the production. In Crypto the miners cannot suddenly issue more currency, meaning there is an inherent risk of capital grid-lock. I get this is a trade off for the other benefits of crypto but it's one people should be aware of, and why you can't treat it the same way... or rely on it the same way.
imtringued 5y ago
One of the weird parts of fiat banking is that a public institution is almost 100% privatized. This is fine during normal times but during crisis it doesn't work because we want to keep the public institution part alive, which involves saving the private companies that caused the problem.
- jkhdigital 5y ago
  Banking has never been a public institution. Even now the Federal Reserve System is not, in fact, a public entity. It is chartered by the federal government but does whatever it wants within that charter. There are no elected officials at the Fed.
  - bumby 5y ago
    Having elected officials is not what constitutes a public institution. CFR 417.201 defines a public institution as “an institution that is operated by or controlled by the Federal government, a State, or a political subdivision of a State such as a city or county.” For example, as you stated the government sets the Fed charter and thus enumerates their powers and duties. Congress also pays their salaries, so (to a very limited extent) the Fed receives government funding to operate and reports to Congress for accountability. Most federal “public institutions” do not have elected officials, but rather are led by appointees, just like the Fed.

notahacker 5y ago

Banks hold repayable loans which earn them profit instead of printing what they want and lying about backing...

baby 5y ago
You know the 2008 crisis is still fresh in a lot of people’s memory right?
- notahacker 5y ago
  The 2008 crisis was the banks losing their assets, not the banks lying about their assets. Though yes, it amuses me to see crypto advocates' reaction to 2008 was to enthusiastically defend the right of crypto companies to do worse whilst pretending not to.
  - cartoonworld 5y ago
    Didn't the banks lose their assets because of (among other things) the repackaging of mortgages with fraudulent ratings into mislabeled securities, resold as a higher value note?
    - imtringued 5y ago
      Yes but how does crypto solve this problem? Letting people borrow money isn't a flaw in our banking system. The lack of due diligence is.
      - cartoonworld 5y ago
        That's true, but at least programmatic securities for all its pitfalls and possibly bugs, is likely to do what it says on the tin.
- peakaboo 5y ago
  Not to mention there are quite a few people seeing the same signs of a crash now as in 2008.

LatteLazy 5y ago

In a word, no. Banks are required to more in assets than they have in client liability, and to write down the value of those assets based on risk. So they have >100% coverage.

runeks 5y ago
Good point. However, OP specifically said “cash”, not assets in general.
- LatteLazy 5y ago
  Thats fair, though I don't think anyone is holding cash exactly equal to their liabilities. Tether certainly aren't, they make money by investing the revenue they receive if I understand the "claims" correctly...
jkhdigital 5y ago
I think he means capital coverage, which is roughly 5% under the current regulatory scheme. That is, every dollar in liabilities must be covered by at least 5 cents of bank capital.

deleted 5y ago

[deleted]

pjc50 5y ago

This is a mangled version of Basel 3 requirements: https://voxeu.org/article/how-much-equity-capital-should-uk-banks-have https://voxeu.org/article/how-much-equity-capital-should-uk-... Very little of this is "cash" in the physical sense, it's more about how much the bank can absorb losses through selling various tiers of asset as well as through its own share capital.

plebianRube 5y ago

It is presently 0% as of March 2020 https://www.investopedia.com/terms/r/requiredreserves.asp https://www.investopedia.com/terms/r/requiredreserves.asp