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You are well into a philosophical discussion here but I want to point out reserve requirements are not the practical limit on lending (even when they are non-ze
by kasey_junk 4y ago
You are well into a philosophical discussion here but I want to point out reserve requirements are not the practical limit on lending (even when they are non-zero).
The practical limits are actually the a&l requirements of their regulatory frameworks and the expectations of their equity holders. Right now equity holders get antsy if the deposit to loan ratio gets much above .8. Their regulators will almost certainly take them over if their total a:l ratio stays above 1.
But! There are accredited US banks right now with deposit to loan ratios approaching 2 and there is no federal reserve requirement. Those banks are likely in dire financial straights but for the moment they have created money with no federal reserve requirements.
- brutusborn 4y agoThanks for the response! I'm definitely no expert but I think I understand the basics. Other commenters made a similar point about reserve requirements, I definitely overstated their importance. Interesting to hear about the A&L limits and kind of terrifying to know the limits are self-imposed.
- kasey_junk 4y agoThe a&l regulatory requirements are certainly not self imposed. And the limits aren’t just in the form of rough ratios. They outline the classes of debt the balance sheets can have, how they are accounted for, operational procedures around the balance sheet and extensive reporting requirements. But after 2008 equity holders became more risk adverse so demand tighter deposit to loan ratios. This caused the banks to disengage with lending, one of the things that caused the fed to remove the reserve requirement.