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I work at a bank in the US, your statement is false for almost all non-federal banks. There’s some complexity to it, but in general banks are required to have r
by cowthulhu 4y ago
I work at a bank in the US, your statement is false for almost all non-federal banks. There’s some complexity to it, but in general banks are required to have roughly 5% of deposits liquid at the close of every businesss day. There’s some wiggle room, but banks are never allowed to go below 0%. If it looks like they’re going to risk going below 0% they can borrow money from other banks with too much cash through the repo market, but this is expensive and regulators don’t like it so banks will strictly avoid this.
This actually explains why different banks will have different loan/share rates from each other. You’d expect in an efficient market they’d all be the same, but banks deliberately make their offerings less competitive if it’ll leave them with too much cash/debt.
In short, banks do not just create money in the US. They are heavily regulated, and any bank that started cooking the books and lending more than they have would be swiftly taken under management by its regulatory body.
One point that might make this clearer - the government serves as the lender of last resort for a bunch of banks. Lending more than you have would be incredibly risky - why would the institution that has to eat the potential loss allow you to do so?
- janalsncm 4y agoHow does this square with the fact that the reserve rate is now zero? https://www.investopedia.com/terms/r/requiredreserves.asp https://www.investopedia.com/terms/r/requiredreserves.asp
- cowthulhu 4y agoMost banks are regulated by either the FDIC or NCUA, not the Fed. So the fed setting reserve rates doesn’t change anything for banks that, like, normal people use. Additionally, I think you’re viewing reserve rates as the only way banks measure liquidity, which is not the case. But, even if reserve requirements are zero, and banks are allowed to loan out every penny… they’re still not allowed to just make up money, that’s not how it works.
- Nursie 4y agoReserve requirements are not the whole picture, there are also capitalisation requirements. The reserve rate is now zero because it's no longer the favoured mechanism. https://www.federalreserve.gov/supervisionreg/large-bank-capital-requirements.htm https://www.federalreserve.gov/supervisionreg/large-bank-cap...
- globalreset 4y agoAt 5%, banks can create 20 times more new money then they hold deposits. Obviously they don't have to go below 0%, as at 0% they are already at inifinity. Also, they don't have to have the reserves when they are lending, they can just borrow the reserves later, which is a huge difference, as just as we've discovered - lending creates money, so you can stuck it up structurally and keep expanding.
- cowthulhu 4y agoThat’s not at all how that works. At 95%, they can lend 95 cents for every dollar on deposit.
- globalreset 4y agoBank A has $100 deposits, Bank B $0. Bank A creates $95 worth of loans, which get deposited to Bank B. Now Bank A has $100 deposits, $5 reserves, $95 loans. Bank B has $95 deposits. Bank B creates $90.25 worth of loans. These loans gets deposited to bank A. Now Bank B has ... $195.25 deposits and is ready to make $85.7375 in loans again...