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A bank having assets to only cover 100% of its liabilities would be in violation of banking regulations. Since the 2008 financial crisis, the general breakpoint

A bank having assets to only cover 100% of its liabilities would be in violation of banking regulations. Since the 2008 financial crisis, the general breakpoint you're looking for is about 110% as the minimum asset-to-liability ratio for a viable bank. There's also this not-small matter of making sure that banks aren't relying on overly optimistic valuations that won't bear out, especially in a dire market (if you're a too-big-to-fail bank, the government looks at your books and run its own numbers assuming a pretty severe economic crisis). In this regard, Tether's non-transparency is ringing alarm klaxons.

scrubs 5y ago
Well exactly. Big US banks are subject to deep scrutiny.
VirusNewbie 5y ago
Citation? I don't believe this is the case, I believe a bank needs liquid assets to cover a certain amount of its expenses, not all liabilities?
- seoaeu 5y ago
  For liquid assets maybe. But if total assets -- liquid and otherwise -- are insufficient to cover all liabilities, then the bank is straight up insolvent.
jazzyjackson 5y ago
Maybe you can explain this message from the Federal Reserve [0] to me, because I must be misunderstanding. > As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. I've been swayed by the MMT videos on youtube which I know are controversial, but it seems to me that when a bank makes a loan, its deposits on-the-books increase, they do not have to have deposits equal to liabilities, and in fact a loan is not a liability to the bank, it is a liability to the borrower. Am I wrong? [0] https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- jcranmer 5y ago
  There are several different kinds of requirements that banks have. The "reserve requirement ratio" basically means that for every $1000 the bank has in deposits, it is required to keep $X in its account with a Federal Reserve bank. Very specifically, it has to be money sitting in that account--a literal stack of $20 bills doesn't count for the reserve requirement. This has dropped to 0% because the Federal Reserve figures there's better ways of maintaining bank solvency. Instead, most attention nowadays is paid on the capital ratio. This basically says that the bank needs to hold $X equity for every $100 of risk-weighted assets. My understanding is a little fuzzy here, but I believe that the equity here is completely separate from what's normally counted as assets for a bank.
  - jazzyjackson 5y ago
    Ah, that is an important distinction I missed, thank you.

scrubs 5y ago

Well exactly. Big US banks are subject to deep scrutiny.

VirusNewbie 5y ago

Citation? I don't believe this is the case, I believe a bank needs liquid assets to cover a certain amount of its expenses, not all liabilities?

seoaeu 5y ago
For liquid assets maybe. But if total assets -- liquid and otherwise -- are insufficient to cover all liabilities, then the bank is straight up insolvent.

jazzyjackson 5y ago

Maybe you can explain this message from the Federal Reserve [0] to me, because I must be misunderstanding. > As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. I've been swayed by the MMT videos on youtube which I know are controversial, but it seems to me that when a bank makes a loan, its deposits on-the-books increase, they do not have to have deposits equal to liabilities, and in fact a loan is not a liability to the bank, it is a liability to the borrower. Am I wrong? [0] https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm

jcranmer 5y ago
There are several different kinds of requirements that banks have. The "reserve requirement ratio" basically means that for every $1000 the bank has in deposits, it is required to keep $X in its account with a Federal Reserve bank. Very specifically, it has to be money sitting in that account--a literal stack of $20 bills doesn't count for the reserve requirement. This has dropped to 0% because the Federal Reserve figures there's better ways of maintaining bank solvency. Instead, most attention nowadays is paid on the capital ratio. This basically says that the bank needs to hold $X equity for every $100 of risk-weighted assets. My understanding is a little fuzzy here, but I believe that the equity here is completely separate from what's normally counted as assets for a bank.
- jazzyjackson 5y ago
  Ah, that is an important distinction I missed, thank you.