4 ms·

Kind of true, but keep in mind that they are allowed to loan out 20x of what you deposit (fractional reserve banking).

by Matumio 4y ago

knewter 4y ago
During covid they lifted reserve requirements, essentially removing the "limit" of 20x
- kasey_junk 4y ago
  The reserve requirement is likely the least important restriction on loan to deposit ratio in banking. The reserve lifted the limit because US banks weren’t loaning out _enough_. At the time of the lifting of the limit the loan to deposit ratio was sitting somewhere around 60%. Since it was lifted that ratio has gone up to 62% (during a corresponding increased interest rate environment). The fed, fdic and occ all maintain a variety of a&l rules that outline what categories of loans can be approved that range the gamut from in state/out state to subsidized loans/market rate loans. Thats before taking into account all the consumer protection frameworks. All that is to say, if a bank gets to a loan/deposit ratio above .9 they are likely considered insolvent depending on the framework in question. The reserve requirement is no brake on their ability to loan out deposits, but there are lots of other ones that apply.
  - jacobr1 4y ago
    How is that distributed? Are there banks with much higher/lower ratios? Or are most banks the same for given market (and regulatory) conditions?
    - kasey_junk 4y ago
      I couldn’t find the Fred report on this (I’m sure I’ve seen it before) so couldn’t get a real distribution but generally you’ll see most banks between 70-90%. Prior to 2008 90% was considered about the top end before people freaked out. That number is now closer to 80. You will also see a few outliers at >100 (probably in very bad financial straits) and some in the 40s (probably don’t actually do much consumer lending and the deposits are for some niche usage). I think the thing that actually moved the fed to remove the reserve requirement was the big banks sitting in the 50-70 range (and of course the covid liquidity crunch). The monopoly we grant banks is in part so they will finance economic activity, if they aren’t doing that we’ve got a structural problem.

Kind of true, but keep in mind that they are allowed to loan out 20x of what you deposit (fractional reserve banking).

knewter 4y ago

During covid they lifted reserve requirements, essentially removing the "limit" of 20x

kasey_junk 4y ago
The reserve requirement is likely the least important restriction on loan to deposit ratio in banking. The reserve lifted the limit because US banks weren’t loaning out _enough_. At the time of the lifting of the limit the loan to deposit ratio was sitting somewhere around 60%. Since it was lifted that ratio has gone up to 62% (during a corresponding increased interest rate environment). The fed, fdic and occ all maintain a variety of a&l rules that outline what categories of loans can be approved that range the gamut from in state/out state to subsidized loans/market rate loans. Thats before taking into account all the consumer protection frameworks. All that is to say, if a bank gets to a loan/deposit ratio above .9 they are likely considered insolvent depending on the framework in question. The reserve requirement is no brake on their ability to loan out deposits, but there are lots of other ones that apply.
- jacobr1 4y ago
  How is that distributed? Are there banks with much higher/lower ratios? Or are most banks the same for given market (and regulatory) conditions?
  - kasey_junk 4y ago
    I couldn’t find the Fred report on this (I’m sure I’ve seen it before) so couldn’t get a real distribution but generally you’ll see most banks between 70-90%. Prior to 2008 90% was considered about the top end before people freaked out. That number is now closer to 80. You will also see a few outliers at >100 (probably in very bad financial straits) and some in the 40s (probably don’t actually do much consumer lending and the deposits are for some niche usage). I think the thing that actually moved the fed to remove the reserve requirement was the big banks sitting in the 50-70 range (and of course the covid liquidity crunch). The monopoly we grant banks is in part so they will finance economic activity, if they aren’t doing that we’ve got a structural problem.