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> 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 a

• 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.
      • lowkey 5y ago
        > 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. If I am mistaken please correct me with citations but respectfully, I believe your understanding is incorrect. In a fractional reserve system banks can and do fractionalize dollars into existence. The mechanism is slightly different than when the FED prints money. Instead of creating money out of nothing, banks can only create loan money out of thin air. For example, when you are issued a new car loan from a bank, those funds do not come from another depositor. (see my comment above on 0% reserve ratio). Instead the money is literally created by the stroke of a pen when the borrower signs the loan agreement. The funds did not exist anywhere prior to the loan. The numbers were added to the customer's bank account the moment they signed the loan agreement. Money created out of thin air via fractional reserve lending. If it were not for the free money creation feature of the banks, then banks would have to lend customer funds or their own reserves. The risk and cost of lending these real assets would greatly exceed the ultra-low interest rate environment we currently experience and the cheap credit days would be over. The fraud involved in fractional reserve lending is that the lender has no cost of funds. They are not risking their own assets and are therefore more willing to lend cheaply. This leads to credit bubbles that perpetuate the business cycle and lead to a series of booms and crashes. Fractional reserve lending is a scam and banks are technically all insolvent.