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Just to be clear for everyone: banks don't keep 100% deposits in a big vault, where a full-customer-withdrawal can and should be expected and permitted. Banks

Just to be clear for everyone: banks don't keep 100% deposits in a big vault, where a full-customer-withdrawal can and should be expected and permitted. Banks even at their simplest "Main Street local level", need to keep, say, 15% or 20% of their deposited funds available, as determined centrally e.g. the Fed or the Bank of England. The rest by design is to be lent out, that's how banks offer loans, mortgages etc. So "we can't immediately return 40% or 60% or 80% of deposits" really isn't any kind of gotcha or big secret. No bank in the world can handle such a situation. So: runs can and do happen, and are always a threat, and currently might be happening. The question is: how to handle it in a grown up manner.

CGamesPlay 4y ago
But isn't this the point of FDIC? Even if SVB becomes insolvent, your account value is insured by the federal government? I'm not very familiar with all of this, so please help me understand what I'm missing.
- dkrich 4y ago
  Up to $250k
  - willis936 4y ago
    Or 3 business days of burn at my company.
  - owenmarshall 4y ago
    Adding on to this as explanation for GP: Funds over the FDIC limit aren’t just surrendered; instead, you become a creditor to the failed institution. The FDIC works to recover those funds - good loans are sold to other institutions, payments due are collected, furniture and real estate is sold, the usual. So a percentage of your money may be paid to you over several years time. Good luck managing free cash flow in the meantime.
tremarley 4y ago
Banks are required to keep 0% in reserves as of March 26, 2020.
jcbrand 4y ago
> The rest by design is to be lent out, that's how banks offer loans, mortgages etc. When banks lend out money, they don't lend out existing deposits, they create new (debt-based) money from nothing and this new money is fractionally backed by deposits. With 10% fractional reserves, if they have $100 in deposits, they can lend out $1000, thereby creating $900 of new money from nothing.
- chii 4y ago
  > thereby creating $900 of new money from nothing. and if all of a sudden, the depositors decide to take out their $100 in deposits, the bank is in trouble, because they'd still have the $1000 in loans, which is now not backed by any reserves. They, if this were to happen, would be required to obtain the reserves somehow - borrow from another bank, from central bank, or attract new depositors. so in essence, the idea that the depositor's money is "lent out" is not technically correct, but the idea is not too different.
- kasey_junk 4y ago
  The US average loan to deposit ratio sits around .8. SVB is at around .45. Loan to deposit ratio is orthogonal to reserve ratios, which is orthogonal to capital requirements. It’s not that banks are loaning out more than their deposits that creates new money, it’s that they are loaning out money _at all_ that does.
- spongebobism 4y ago
  The second sentence is a bit misleading. Reserves are not a prerequisite for lending in our monetary system. The bank gives out all the loans that it deems profitable and only has to ensure after the fact that its balance with the central bank is sufficient (in your example, if it had loaned out 1700$, it would need to increase the balance by 70$, e.g. by taking out a loan with the central bank). edit: Here is a great explanation: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654 https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... Quote: "Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. In that view, central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits. For the theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality."
neilwilson 4y ago
"The rest by design is to be lent out," It isn't. That's a myth. It never has been how banks work and never will be. Destructive runs can never happen in a modern banking system if the central bank does their job properly. If everybody takes their money out of a bank in trouble, then the central bank ends up as the main depositor in that bank. Which is as it should be - since they were regulating that bank. The question here is whether the regulator has been asleep at the wheel and whether depositors over the FDIC limit are going to pay for that.

CGamesPlay 4y ago

But isn't this the point of FDIC? Even if SVB becomes insolvent, your account value is insured by the federal government? I'm not very familiar with all of this, so please help me understand what I'm missing.

dkrich 4y ago
Up to $250k
- willis936 4y ago
  Or 3 business days of burn at my company.
- owenmarshall 4y ago
  Adding on to this as explanation for GP: Funds over the FDIC limit aren’t just surrendered; instead, you become a creditor to the failed institution. The FDIC works to recover those funds - good loans are sold to other institutions, payments due are collected, furniture and real estate is sold, the usual. So a percentage of your money may be paid to you over several years time. Good luck managing free cash flow in the meantime.

tremarley 4y ago

Banks are required to keep 0% in reserves as of March 26, 2020.

jcbrand 4y ago

> The rest by design is to be lent out, that's how banks offer loans, mortgages etc. When banks lend out money, they don't lend out existing deposits, they create new (debt-based) money from nothing and this new money is fractionally backed by deposits. With 10% fractional reserves, if they have $100 in deposits, they can lend out $1000, thereby creating $900 of new money from nothing.

chii 4y ago
> thereby creating $900 of new money from nothing. and if all of a sudden, the depositors decide to take out their $100 in deposits, the bank is in trouble, because they'd still have the $1000 in loans, which is now not backed by any reserves. They, if this were to happen, would be required to obtain the reserves somehow - borrow from another bank, from central bank, or attract new depositors. so in essence, the idea that the depositor's money is "lent out" is not technically correct, but the idea is not too different.
kasey_junk 4y ago
The US average loan to deposit ratio sits around .8. SVB is at around .45. Loan to deposit ratio is orthogonal to reserve ratios, which is orthogonal to capital requirements. It’s not that banks are loaning out more than their deposits that creates new money, it’s that they are loaning out money _at all_ that does.
spongebobism 4y ago
The second sentence is a bit misleading. Reserves are not a prerequisite for lending in our monetary system. The bank gives out all the loans that it deems profitable and only has to ensure after the fact that its balance with the central bank is sufficient (in your example, if it had loaned out 1700$, it would need to increase the balance by 70$, e.g. by taking out a loan with the central bank). edit: Here is a great explanation: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654 https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... Quote: "Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. In that view, central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits. For the theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality."

neilwilson 4y ago

"The rest by design is to be lent out," It isn't. That's a myth. It never has been how banks work and never will be. Destructive runs can never happen in a modern banking system if the central bank does their job properly. If everybody takes their money out of a bank in trouble, then the central bank ends up as the main depositor in that bank. Which is as it should be - since they were regulating that bank. The question here is whether the regulator has been asleep at the wheel and whether depositors over the FDIC limit are going to pay for that.