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How do you think banks fund loans? They use customer deposits and operate as a fractional reserve. If the large banks have liquidity problems, it means they’re

How do you think banks fund loans? They use customer deposits and operate as a fractional reserve. If the large banks have liquidity problems, it means they’re no longer able to give people their deposits back as cash. They simply don’t have the money to give to depositors. In this scenario government steps to cover the shortfall, but there’s a limit to how much the government can cover, so many people, in particular business, will simply take involuntary haircuts to their bank balances. In this situation people start taking their money of banks, because trust has been destroyed, causing a bank run. Which makes the situation even worse, because then any bank that lends will have a liquidity crisis, because they operate as a fractional reserve. In the end the government ends up effectively bailing out the banks anyway, by covering peoples deposits. Except now most banks have collapsed completely, taking huge amounts of financial infrastructure with them, plus the people needed to administrate and operate financial aspect of the economy, and nobody trusts the banks that managed to survive (assuming any did). So worst case is bad, really bad. A cascading failure of banks means you wake up one morning and money that isn’t under your mattress has disappeared. You cash accounts, your savings accounts, your investment accounts. In addition you’ll have a line of people demanding you repay any loans you have, your car lease, your mortgage, your credit cards etc. Banks considered “to-big-to-fail” have that label because their collapse has a significant risk of causing a cascading failure of banks across the entire economy. So bailing them out is much cheaper and safer to do, but allowing them to continue existing is just negligent.

lowkey 5y ago
> They use customer deposits and operate as a fractional reserve. Close, but not quite. The banks are barred from using customer deposits to fund loans. They also have a 0% reserve ratio currently so it is 100% fractional reserve. In short the banking system is a scam, always has been. It is the greatest scam ever perpetuated on humanity. If any other industry operated on the level of fraud involved in running a fractional reserve, they would be jailed by midnight.
- avianlyric 5y ago
  Nah, it’s just an efficient way to free up capital and do something useful with it. Not sure if the details, but banks should be using customer deposit for loans. They can’t fund loses etc out of them, but they can (and should) use the capital for lending. If banks didn’t lend the money, how would you expect them to pay internet on your savings or fund the costs associated with just storing your money for you? It costs quite a lot of money to run a bank, even a bank that only handles customer deposits and has no lending activity. Most consumers aren’t in paying the full cost of administrating their budgets, but cost has to be covered somehow. Additionally if banks didn’t operate as a factional reserve, we would have a permanent credit crisis, because there would be no capital to fund any form of credit, from credit cards to mortgages. Either that or you would have to engage entirely in P2P lending, which removes the ability to aggregate and distribute risk, lowering each individual exposure. Or you would have a P2P system with someone aggregating and selling that risk, but that’s just banks in another name.
  - lowkey 5y ago
    See: https://www.investopedia.com/terms/r/requiredreserves.asp https://www.investopedia.com/terms/r/requiredreserves.asp > On March 15, 2020, the Federal Reserve Board announced that reserve requirements ratios would be set to 0%, effective March 26, 2020. Prior to the change effective March 26, 2020, the reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the institution. A reserve ratio of 0% means no customer funds are used to pay loans. The fraud is that the money is fractionalized into thin air. > Additionally if banks didn’t operate as a factional reserve, we would have a permanent credit crisis … Or there wouldn’t be as much cheap credit floating out there, forcing lenders to charge a more reasonable rate for borrowing. Cheap money creates financial crises.
    - avianlyric 5y ago
      > A reserve ratio of 0% means no customer funds are used to pay loans. The fraud is that the money is fractionalized into thin air. No, that means that all customer deposits can be used for loans. There’s zero requirement for banks to hold any deposits in reserve to ensure they’re able to pay out individual depositors on request. In short, they can lend an amount of money equal to the amount deposited with them. They can’t magic money out of nowhere, only the fed can do that. > Or there wouldn’t be as much cheap credit floating out there, forcing lenders to charge a more reasonable rate for borrowing. Cheap money creates financial crises. Also no, poor risk management creates financial crises. Cheap credit itself doesn’t cause anything. It’s irresponsible lending, and failure to properly account for credit risk that creates a problem. There would be pretty much no risk in lending Jeff Bezos huge amounts of money at 0%, because it would be trivial to securitise it with physical assets and stocks. But lending at similar amount of money to someone with no income or assets would be very risky. Lenders always want to charge more interest, that’s how they make money, and they need to charge a minimum amount to cover the costs of administering the loans, and the costs of loans that default. The idea that lenders want to lend cheaply is nonsense, it like saying a shop only wants sell everything as cheap as possible. Both shops and lender sell/lend as cheap as is needed to compete, and no more. Anything else would be voluntarily giving up profit margin, find me a bank that wants to do that.
cudgy 5y ago
FDIC insures deposits and banks fail. Government tightens the capital reserve requirements for new and surviving banks. That’s what is supposed to happen. Instead Federal Reserve slings cash around to prop up poorly managed banks and the con continues.

lowkey 5y ago

> They use customer deposits and operate as a fractional reserve. Close, but not quite. The banks are barred from using customer deposits to fund loans. They also have a 0% reserve ratio currently so it is 100% fractional reserve. In short the banking system is a scam, always has been. It is the greatest scam ever perpetuated on humanity. If any other industry operated on the level of fraud involved in running a fractional reserve, they would be jailed by midnight.

avianlyric 5y ago
Nah, it’s just an efficient way to free up capital and do something useful with it. Not sure if the details, but banks should be using customer deposit for loans. They can’t fund loses etc out of them, but they can (and should) use the capital for lending. If banks didn’t lend the money, how would you expect them to pay internet on your savings or fund the costs associated with just storing your money for you? It costs quite a lot of money to run a bank, even a bank that only handles customer deposits and has no lending activity. Most consumers aren’t in paying the full cost of administrating their budgets, but cost has to be covered somehow. Additionally if banks didn’t operate as a factional reserve, we would have a permanent credit crisis, because there would be no capital to fund any form of credit, from credit cards to mortgages. Either that or you would have to engage entirely in P2P lending, which removes the ability to aggregate and distribute risk, lowering each individual exposure. Or you would have a P2P system with someone aggregating and selling that risk, but that’s just banks in another name.
- lowkey 5y ago
  See: https://www.investopedia.com/terms/r/requiredreserves.asp https://www.investopedia.com/terms/r/requiredreserves.asp > On March 15, 2020, the Federal Reserve Board announced that reserve requirements ratios would be set to 0%, effective March 26, 2020. Prior to the change effective March 26, 2020, the reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the institution. A reserve ratio of 0% means no customer funds are used to pay loans. The fraud is that the money is fractionalized into thin air. > Additionally if banks didn’t operate as a factional reserve, we would have a permanent credit crisis … Or there wouldn’t be as much cheap credit floating out there, forcing lenders to charge a more reasonable rate for borrowing. Cheap money creates financial crises.
  - avianlyric 5y ago
    > A reserve ratio of 0% means no customer funds are used to pay loans. The fraud is that the money is fractionalized into thin air. No, that means that all customer deposits can be used for loans. There’s zero requirement for banks to hold any deposits in reserve to ensure they’re able to pay out individual depositors on request. In short, they can lend an amount of money equal to the amount deposited with them. They can’t magic money out of nowhere, only the fed can do that. > Or there wouldn’t be as much cheap credit floating out there, forcing lenders to charge a more reasonable rate for borrowing. Cheap money creates financial crises. Also no, poor risk management creates financial crises. Cheap credit itself doesn’t cause anything. It’s irresponsible lending, and failure to properly account for credit risk that creates a problem. There would be pretty much no risk in lending Jeff Bezos huge amounts of money at 0%, because it would be trivial to securitise it with physical assets and stocks. But lending at similar amount of money to someone with no income or assets would be very risky. Lenders always want to charge more interest, that’s how they make money, and they need to charge a minimum amount to cover the costs of administering the loans, and the costs of loans that default. The idea that lenders want to lend cheaply is nonsense, it like saying a shop only wants sell everything as cheap as possible. Both shops and lender sell/lend as cheap as is needed to compete, and no more. Anything else would be voluntarily giving up profit margin, find me a bank that wants to do that.

cudgy 5y ago

FDIC insures deposits and banks fail. Government tightens the capital reserve requirements for new and surviving banks. That’s what is supposed to happen. Instead Federal Reserve slings cash around to prop up poorly managed banks and the con continues.