8 ms·

I've been trying to figure out what SVB's reserve requirements were and found (https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalr

I've been trying to figure out what SVB's reserve requirements were and found (https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm): "As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions." Wat?

gruez 4y ago
They removed reserve requirements (ie. cash you need to keep on hand) but there's still capital requirements (ie. assets you need to keep on hand).
- eru 4y ago
  Yes. Though as a small nitpick, I wouldn't describe capital requirements as 'assets you need to keep on hand'. No matter your capital structure, all your liabilities will be matched by assets. What matters is that after your accounting for your fixed liabilities, like deposits, you still have plenty of total assets left over to have a thick equity cushion to absorb losses. In accounting terms, equity is also a liability. But it's a very benign one, as your shareholders can't demand their money back. There are other forms of liabilities that act like equity in their ability to absorb losses. But equity is the simplest and generally the most import one.
  - helsontaveras18 4y ago
    Wow, I never thought of / heard anyone explain equity as a liability to pay to shareholders. It’s brilliant!
    - eru 4y ago
      You might like to read up on the very basics of accounting. There's lots of other interesting concepts there. See https://martin.kleppmann.com/2011/03/07/accounting-for-computer-scientists.html https://martin.kleppmann.com/2011/03/07/accounting-for-compu... for an intro. Accounting might sound rather boring, but at its core its about understanding businesses (and economies) with numbers. It can be as varied and interesting as companies are. Of course, in practice there's lots of cruft build on top of relatively simple concepts. But the simple underlying concepts are still fascinating. The link above explains double entry book keeping in terms of graph theory and network flows. The basics of deprecation are also quite interesting (to me, at least).
      - orwin 4y ago
        Just a small comment on this: To me, accountants have a better grip on reality than economists. It's an accountant who taught me real economics (I was originally pursuing a math degree with economy as a 'minor' (not really how it's working in my country but close enough)). I had to unlearn some of what I learned in my first year, but I had a way better grip on how money work after that (and decided to create value and changed course).
        eru 4y ago
        Yes. Well, carpenters have an even better grip on reality. Accountants and economists are doing different things. Both fields are useful, and there's some small overlap between the two. Many people could benefit from learning some 'rationalised' accounting, ie accounting without the accumulated historical accidents and tax dodges. (Those are also interesting. But less as a description of a reality, and more in the same vein that the Talmud is interesting.)
        orwin 4y ago
        But orthodox economic theory goes against most thing i learned. To be honest, i really thought it didn't matter, that macroeconomics was on its own, and that economists are valid expert to listen to. We were still in eurozone crisis, and while i thought "This plan doesn't make much sense" when the Troika laid out what Greece should do, GDP and socioeconomic markers were not stuff i learned or cared about. And then like 5 years ago, i learn about MMT, read about it, disagree on some points, but it overall make much, much more sense and si way closer to reality than Friedman theories to me. It seems like macroeconomics do follow the stuff i learned when i wanted to become a quantitative analyst or whatever (i only wanted to do math tbh, and didn't follow finance classes that much). And then during Covid we have all those "expert" economists who start to talk everywhere. But now, i am sure they are talking out of their own asses. They had now idea of what production is. The simple idea that production is linked with energy is novel for them. They probably are useful, like sociologists are useful, but i'd like to hear them on medias as much as i hear sociologists. Or even less, since i do think sociologists have real-world application to their thesis, for harm reduction during stampede. Let's say as much as medievalists historians.
- derf_ 4y ago
  They relaxed the need for a capital conservation buffer, too. These actions were part of the Fed's response to the market panic at the onset of the pandemic, and you can read a bit about their reasoning in their own press release: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... Capital requirements are complicated. There are different types of equity and assets are risk-weighted, but treasuries and the types of bonds SVB bought are generally given the lowest risk-weightings.
  - Jensson 4y ago
    Funny that they didn't deem T-Bonds to be high risk given that it was they who crashed the value of those T-Bond by increasing interest rates.
    - panarky 4y ago
      You identified the root cause of this whole thing. Long-term bonds get preferential treatment in the risk-based capital calculation because they have low default risk, which allows banks to run with thinner equity capital, even though they're exposed to high interest rate risk and have a portfolio highly concentrated in one high-risk industry. Capital ratios don't adequately account for actual risk.
      - eru 4y ago
        Yes. That's (part of) why FDIC is a bad idea: it partially insulates depositors from the need to monitor what their bank is doing. In banking, we want a flight to quality.
        CHY872 4y ago
        And the FAA is a bad idea because it insulates travelers from the need to monitor what their plane is doing?
        4y ago
- sScTE9qEMCxEk34 4y ago
  Isn't cash kept on hand the relevant attribute here? Whether they're solvent or not, they ran out of cash to meet withdrawals.
- mullingitover 4y ago
  What I don’t understand is why they weren’t restored as part of the effort to tamp down inflation, and instead the fed just raised rates. Seems like that should’ve been the first move.
- sgt101 4y ago
  My little brain sees this as a reason for failure here. SVB had liquid assets (bonds) that it could sell to meet the demands of the depositors, but those assets fell in value creating losses. The bank was forced to crystalise those losses because it had no cash buffer to fall back on. If some substantial part of the liquidity had been held as cash this wouldn't have happened.
  - BrandonS113 4y ago
    No. This week, the treasuries and other assets in capital are effectively cash equivalents.
    - rvnx 4y ago
      The worst part of it, is that once interest rates started raising and they started seeing the obvious (but not critical!) impact on their long-maturity bonds, they simply could have switched to shorter-maturity bonds and be totally fine. But they preferred to gamble.
eru 4y ago
Reserve requirements are pretty silly. Many countries never had them. What you want to keep banks afloat are capital buffers, not reserves. Expressed differently: reserves are like cash in a vault (or electronic equivalents). What you want instead is a big buffer of equity in the capital structure, so that shareholders can absorb huge losses long before creditors do. In regulatory terms something like this is called 'minimum capital adequacy ratio'. But it's generally better to set up the rules of the game so that banks naturally want to have more of an equity cushion, instead of giving them strict rules on capital buffers but leave lots of incentives to work around those rules. As an example of incentives: many tax codes around the world let you pay interest with pre-tax money but dividends have to be paid with post-tax money. (That's simplified, since there's lots of different taxes.)
- rtpg 4y ago
  I get that other countries are also doing this but “oh this bag is equities is safe because it’s diverse” proving to be false all the time feels like a good argument against this logic. Granted if SVB had all these bonds that would pay out “guaranteed” that feels pretty strong
  - wil421 4y ago
    How are they proving to be false all the time? The FDIC said the last bank they took over was in 2020.
    - bbor 4y ago
      I’d be curious to hear why such a cadence (let’s say 15 years) is an acceptable price to pay in your book. Do you think this system leads to such substantive increases in American standard of living that it’s worth giant banks toppling do often?
    - rtpg 4y ago
      What I was glibly saying was that “we have securities X Y and Z that are in aggregate worth T dollars at current market prices, thus this is like we have T liquid dollars” shortcuts have lead to so many problems when macro economics happen. I am being glib, though I am very wary of the safety of things that aren’t just like… cash. “We haven’t had to take over a bank for 2 years!” Isn’t as much of a vote of confidence in a system as I’d like.
NovemberWhiskey 4y ago
The thing to understand about the change in policy regime that led to the elimination of the reserve requirement is this: banks were (and are) holding massively more reserves than they needed to. They didn’t need the Fed to tell them to do this, so it was not an effective monetary policy tool any more. In economic terms: the supply of reserves was so high that it was in an inelastic part of the demand curve for reserves. The new regime (“ample reserves”) depends on administered interest rates, rather than reserve requirements, to set short-term interest rates. It is absolutely not the case that the reserve requirements were removed to allow banks to reduce their reserves.
- mike_d 4y ago
  All cars have seat belts. It isn't effective policy to require them.
  - NovemberWhiskey 4y ago
    You need to extend your metaphor. Imagine instead that the government was paying car manufacturers more than the cost of installation for every seat belt in a car. You wouldn’t need to have a policy requiring seatbelts: every car would be liberally festooned with them.
    - pishpash 4y ago
      But it costs the taxpayer money that way via the interest payments, whereas one more regulation doesn't.
      - NovemberWhiskey 4y ago
        Honestly, if you don't understand the difference between the Treasury and the Federal Reserve (as this comment suggests), I'm sorry to say that you're not going to find this conversation very enlightening.
        4y ago
kilgnad 4y ago
If I get a loan from Bank A, then I use that loan to pay a person who deposits the IOU into Bank B. Bank B will go to Bank A and demand the money in cash because it's a competitor bank. If bank A has zero cash on hand they immediately hit a bank run, so basically bank A wants to keep a certain ratio at all times. Thus through the existence of competitor banks, banks are NATURALLY incentivized to keep a reserve ratio. A reserve ratio enforced by law is not necessary in a capitalist economy with healthy competition. Competition prevents banks from going crazy with creating money out of thin air via loans. The removal of the reserve ratio by the government is relatively inconsequential. However this natural regulation through competition is negated by the existence of an entity without competition. The central bank. The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. Low interest rates are what caused inflation and high interest rates from the central bank are what are now being used to stop inflation. So in this case Bank A can now borrow a bunch of money from the Central Bank thereby increasing it's reserve ratio allowing it to lend more money out. In a sense, the central bank is essentially the entity where the fractional reserve ratio actually matters. The central bank is unregulated so they can print money to loan to other banks however much they like. Thus a bank run on the central bank is impossible. The ratio in this case matters more as a metric that correlates with inflation.
- eru 4y ago
  I have great sympathy for your argument, and agree with the gist of it. What you are describing is pretty close to the free banking eras of eg Scotland and Canada. > The central bank is unregulated [...] That's not true. Many central banks have lots of regulations on them. However, they are not regulated by the kind of competition you outlined above. > [...] The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. [...] It's probably more productive to think in terms of the total money supply, and less in terms of interest rates. For one, loaning money to banks is only one part of what the Fed does. They also outright buy and sell assets (eg in open market transactions). In many instances, the banks (technically) lend money to the Fed by having positive account balances at the Fed. For a contrasting example on how interest rates don't need to be the focus of monetary policy, have a look at the Monetary Authority of Singapore. Instead of using interest rates as a channel to communicate and effect their monetary policy, they use the exchange rate of the Singapore dollar to a basket of foreign currencies. Crudely, instead of 'setting' the interest rate, they 'set' the exchange rate. Simplified a bit, they 'set' the exchange rate by standing by to buy and sell Singapore dollar to any comer. They have a printing press, so they can push down the exchange rate as much as they want to, and they also have enough assets to prop it up. Crucially, this framework doesn't need to worry about any zero bound on interest rates. It works as long as Singapore dollars are worth anything more than zero.
jcranmer 4y ago
The reserve requirement ratio is the amount of money the bank needs to hold at its account with one of the Federal Reserve Banks per dollar of deposits. A literal pile of cash would not count a single cent towards that requirement. Modern requirements are based on core capital ratio, which is basically the ratio of a pile of cash that is set aside to deal with losses of assets as a fraction of the assets (weighted by risk, so, e.g., you don't need to set aside any money to protect against a literal pile of cash but you need lots of money to protect against a shitton of shitcoins).
- eru 4y ago
  I mostly agree. > A literal pile of cash would not count a single cent towards that requirement. Are you sure about that? Do you have a source? As far as I am aware, vault cash is fine, just way less convenient than an account at the Fed. But I admit that I don't know the exact rules, and would be happy to be proven wrong. > Modern requirements are based on core capital ratio [...] I think you can strike the word 'modern' from that sentence. Capital cushions have been a thing for a long, long time. What's 'modern' is that the US mostly stopped having reserve requirements (though the new rules are written in such a way as to all-but force American banks to hold lots of American government debt as a sort-of reserve in disguise).
  - jcranmer 4y ago
    I've gotten my information from https://www.federalreserve.gov/monetarypolicy/reserve-maintenance-manual-about-this-manual.htm https://www.federalreserve.gov/monetarypolicy/reserve-mainte..., although I may be misreading it.
    - eru 4y ago
      Thanks! Following a link from there, I get to https://www.federalreserve.gov/monetarypolicy/reserve-maintenance-manual-maintenance-of-reserve-balance-requirements.htm https://www.federalreserve.gov/monetarypolicy/reserve-mainte... and this says: > During each reserve maintenance period an institution must satisfy its reserve requirement in the form of vault cash or, if vault cash is insufficient to satisfy the requirement, in the form of a balance maintained with a Federal Reserve Bank. The portion of the reserve requirement not satisfied by vault cash is called the reserve balance requirement. In any case, I'm still agreeing with you!
deleted 4y ago
[deleted]
jbverschoor 4y ago
Old news ;)
alangibson 4y ago
The textbook story about banks taking in deposits and lending some of them back out hasn't been true in modern economies for a long time. Banks don't need deposits to make loans. It's a long story, so I always recommend going down the Modern Monetary Theory rabbit hole.

gruez 4y ago

They removed reserve requirements (ie. cash you need to keep on hand) but there's still capital requirements (ie. assets you need to keep on hand).

eru 4y ago
Yes. Though as a small nitpick, I wouldn't describe capital requirements as 'assets you need to keep on hand'. No matter your capital structure, all your liabilities will be matched by assets. What matters is that after your accounting for your fixed liabilities, like deposits, you still have plenty of total assets left over to have a thick equity cushion to absorb losses. In accounting terms, equity is also a liability. But it's a very benign one, as your shareholders can't demand their money back. There are other forms of liabilities that act like equity in their ability to absorb losses. But equity is the simplest and generally the most import one.
- helsontaveras18 4y ago
  Wow, I never thought of / heard anyone explain equity as a liability to pay to shareholders. It’s brilliant!
  - eru 4y ago
    You might like to read up on the very basics of accounting. There's lots of other interesting concepts there. See https://martin.kleppmann.com/2011/03/07/accounting-for-computer-scientists.html https://martin.kleppmann.com/2011/03/07/accounting-for-compu... for an intro. Accounting might sound rather boring, but at its core its about understanding businesses (and economies) with numbers. It can be as varied and interesting as companies are. Of course, in practice there's lots of cruft build on top of relatively simple concepts. But the simple underlying concepts are still fascinating. The link above explains double entry book keeping in terms of graph theory and network flows. The basics of deprecation are also quite interesting (to me, at least).
    - orwin 4y ago
      Just a small comment on this: To me, accountants have a better grip on reality than economists. It's an accountant who taught me real economics (I was originally pursuing a math degree with economy as a 'minor' (not really how it's working in my country but close enough)). I had to unlearn some of what I learned in my first year, but I had a way better grip on how money work after that (and decided to create value and changed course).
      - eru 4y ago
        Yes. Well, carpenters have an even better grip on reality. Accountants and economists are doing different things. Both fields are useful, and there's some small overlap between the two. Many people could benefit from learning some 'rationalised' accounting, ie accounting without the accumulated historical accidents and tax dodges. (Those are also interesting. But less as a description of a reality, and more in the same vein that the Talmud is interesting.)
        orwin 4y ago
        But orthodox economic theory goes against most thing i learned. To be honest, i really thought it didn't matter, that macroeconomics was on its own, and that economists are valid expert to listen to. We were still in eurozone crisis, and while i thought "This plan doesn't make much sense" when the Troika laid out what Greece should do, GDP and socioeconomic markers were not stuff i learned or cared about. And then like 5 years ago, i learn about MMT, read about it, disagree on some points, but it overall make much, much more sense and si way closer to reality than Friedman theories to me. It seems like macroeconomics do follow the stuff i learned when i wanted to become a quantitative analyst or whatever (i only wanted to do math tbh, and didn't follow finance classes that much). And then during Covid we have all those "expert" economists who start to talk everywhere. But now, i am sure they are talking out of their own asses. They had now idea of what production is. The simple idea that production is linked with energy is novel for them. They probably are useful, like sociologists are useful, but i'd like to hear them on medias as much as i hear sociologists. Or even less, since i do think sociologists have real-world application to their thesis, for harm reduction during stampede. Let's say as much as medievalists historians.
derf_ 4y ago
They relaxed the need for a capital conservation buffer, too. These actions were part of the Fed's response to the market panic at the onset of the pandemic, and you can read a bit about their reasoning in their own press release: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... Capital requirements are complicated. There are different types of equity and assets are risk-weighted, but treasuries and the types of bonds SVB bought are generally given the lowest risk-weightings.
- Jensson 4y ago
  Funny that they didn't deem T-Bonds to be high risk given that it was they who crashed the value of those T-Bond by increasing interest rates.
  - panarky 4y ago
    You identified the root cause of this whole thing. Long-term bonds get preferential treatment in the risk-based capital calculation because they have low default risk, which allows banks to run with thinner equity capital, even though they're exposed to high interest rate risk and have a portfolio highly concentrated in one high-risk industry. Capital ratios don't adequately account for actual risk.
    - eru 4y ago
      Yes. That's (part of) why FDIC is a bad idea: it partially insulates depositors from the need to monitor what their bank is doing. In banking, we want a flight to quality.
      - CHY872 4y ago
        And the FAA is a bad idea because it insulates travelers from the need to monitor what their plane is doing?
        4y ago
sScTE9qEMCxEk34 4y ago
Isn't cash kept on hand the relevant attribute here? Whether they're solvent or not, they ran out of cash to meet withdrawals.
mullingitover 4y ago
What I don’t understand is why they weren’t restored as part of the effort to tamp down inflation, and instead the fed just raised rates. Seems like that should’ve been the first move.
sgt101 4y ago
My little brain sees this as a reason for failure here. SVB had liquid assets (bonds) that it could sell to meet the demands of the depositors, but those assets fell in value creating losses. The bank was forced to crystalise those losses because it had no cash buffer to fall back on. If some substantial part of the liquidity had been held as cash this wouldn't have happened.
- BrandonS113 4y ago
  No. This week, the treasuries and other assets in capital are effectively cash equivalents.
  - rvnx 4y ago
    The worst part of it, is that once interest rates started raising and they started seeing the obvious (but not critical!) impact on their long-maturity bonds, they simply could have switched to shorter-maturity bonds and be totally fine. But they preferred to gamble.

eru 4y ago

Reserve requirements are pretty silly. Many countries never had them. What you want to keep banks afloat are capital buffers, not reserves. Expressed differently: reserves are like cash in a vault (or electronic equivalents). What you want instead is a big buffer of equity in the capital structure, so that shareholders can absorb huge losses long before creditors do. In regulatory terms something like this is called 'minimum capital adequacy ratio'. But it's generally better to set up the rules of the game so that banks naturally want to have more of an equity cushion, instead of giving them strict rules on capital buffers but leave lots of incentives to work around those rules. As an example of incentives: many tax codes around the world let you pay interest with pre-tax money but dividends have to be paid with post-tax money. (That's simplified, since there's lots of different taxes.)

rtpg 4y ago
I get that other countries are also doing this but “oh this bag is equities is safe because it’s diverse” proving to be false all the time feels like a good argument against this logic. Granted if SVB had all these bonds that would pay out “guaranteed” that feels pretty strong
- wil421 4y ago
  How are they proving to be false all the time? The FDIC said the last bank they took over was in 2020.
  - bbor 4y ago
    I’d be curious to hear why such a cadence (let’s say 15 years) is an acceptable price to pay in your book. Do you think this system leads to such substantive increases in American standard of living that it’s worth giant banks toppling do often?
  - rtpg 4y ago
    What I was glibly saying was that “we have securities X Y and Z that are in aggregate worth T dollars at current market prices, thus this is like we have T liquid dollars” shortcuts have lead to so many problems when macro economics happen. I am being glib, though I am very wary of the safety of things that aren’t just like… cash. “We haven’t had to take over a bank for 2 years!” Isn’t as much of a vote of confidence in a system as I’d like.

NovemberWhiskey 4y ago

The thing to understand about the change in policy regime that led to the elimination of the reserve requirement is this: banks were (and are) holding massively more reserves than they needed to. They didn’t need the Fed to tell them to do this, so it was not an effective monetary policy tool any more. In economic terms: the supply of reserves was so high that it was in an inelastic part of the demand curve for reserves. The new regime (“ample reserves”) depends on administered interest rates, rather than reserve requirements, to set short-term interest rates. It is absolutely not the case that the reserve requirements were removed to allow banks to reduce their reserves.

mike_d 4y ago
All cars have seat belts. It isn't effective policy to require them.
- NovemberWhiskey 4y ago
  You need to extend your metaphor. Imagine instead that the government was paying car manufacturers more than the cost of installation for every seat belt in a car. You wouldn’t need to have a policy requiring seatbelts: every car would be liberally festooned with them.
  - pishpash 4y ago
    But it costs the taxpayer money that way via the interest payments, whereas one more regulation doesn't.
    - NovemberWhiskey 4y ago
      Honestly, if you don't understand the difference between the Treasury and the Federal Reserve (as this comment suggests), I'm sorry to say that you're not going to find this conversation very enlightening.
      - 4y ago

kilgnad 4y ago

If I get a loan from Bank A, then I use that loan to pay a person who deposits the IOU into Bank B. Bank B will go to Bank A and demand the money in cash because it's a competitor bank. If bank A has zero cash on hand they immediately hit a bank run, so basically bank A wants to keep a certain ratio at all times. Thus through the existence of competitor banks, banks are NATURALLY incentivized to keep a reserve ratio. A reserve ratio enforced by law is not necessary in a capitalist economy with healthy competition. Competition prevents banks from going crazy with creating money out of thin air via loans. The removal of the reserve ratio by the government is relatively inconsequential. However this natural regulation through competition is negated by the existence of an entity without competition. The central bank. The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. Low interest rates are what caused inflation and high interest rates from the central bank are what are now being used to stop inflation. So in this case Bank A can now borrow a bunch of money from the Central Bank thereby increasing it's reserve ratio allowing it to lend more money out. In a sense, the central bank is essentially the entity where the fractional reserve ratio actually matters. The central bank is unregulated so they can print money to loan to other banks however much they like. Thus a bank run on the central bank is impossible. The ratio in this case matters more as a metric that correlates with inflation.

eru 4y ago
I have great sympathy for your argument, and agree with the gist of it. What you are describing is pretty close to the free banking eras of eg Scotland and Canada. > The central bank is unregulated [...] That's not true. Many central banks have lots of regulations on them. However, they are not regulated by the kind of competition you outlined above. > [...] The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. [...] It's probably more productive to think in terms of the total money supply, and less in terms of interest rates. For one, loaning money to banks is only one part of what the Fed does. They also outright buy and sell assets (eg in open market transactions). In many instances, the banks (technically) lend money to the Fed by having positive account balances at the Fed. For a contrasting example on how interest rates don't need to be the focus of monetary policy, have a look at the Monetary Authority of Singapore. Instead of using interest rates as a channel to communicate and effect their monetary policy, they use the exchange rate of the Singapore dollar to a basket of foreign currencies. Crudely, instead of 'setting' the interest rate, they 'set' the exchange rate. Simplified a bit, they 'set' the exchange rate by standing by to buy and sell Singapore dollar to any comer. They have a printing press, so they can push down the exchange rate as much as they want to, and they also have enough assets to prop it up. Crucially, this framework doesn't need to worry about any zero bound on interest rates. It works as long as Singapore dollars are worth anything more than zero.

jcranmer 4y ago

The reserve requirement ratio is the amount of money the bank needs to hold at its account with one of the Federal Reserve Banks per dollar of deposits. A literal pile of cash would not count a single cent towards that requirement. Modern requirements are based on core capital ratio, which is basically the ratio of a pile of cash that is set aside to deal with losses of assets as a fraction of the assets (weighted by risk, so, e.g., you don't need to set aside any money to protect against a literal pile of cash but you need lots of money to protect against a shitton of shitcoins).

eru 4y ago
I mostly agree. > A literal pile of cash would not count a single cent towards that requirement. Are you sure about that? Do you have a source? As far as I am aware, vault cash is fine, just way less convenient than an account at the Fed. But I admit that I don't know the exact rules, and would be happy to be proven wrong. > Modern requirements are based on core capital ratio [...] I think you can strike the word 'modern' from that sentence. Capital cushions have been a thing for a long, long time. What's 'modern' is that the US mostly stopped having reserve requirements (though the new rules are written in such a way as to all-but force American banks to hold lots of American government debt as a sort-of reserve in disguise).
- jcranmer 4y ago
  I've gotten my information from https://www.federalreserve.gov/monetarypolicy/reserve-maintenance-manual-about-this-manual.htm https://www.federalreserve.gov/monetarypolicy/reserve-mainte..., although I may be misreading it.
  - eru 4y ago
    Thanks! Following a link from there, I get to https://www.federalreserve.gov/monetarypolicy/reserve-maintenance-manual-maintenance-of-reserve-balance-requirements.htm https://www.federalreserve.gov/monetarypolicy/reserve-mainte... and this says: > During each reserve maintenance period an institution must satisfy its reserve requirement in the form of vault cash or, if vault cash is insufficient to satisfy the requirement, in the form of a balance maintained with a Federal Reserve Bank. The portion of the reserve requirement not satisfied by vault cash is called the reserve balance requirement. In any case, I'm still agreeing with you!

deleted 4y ago

[deleted]

jbverschoor 4y ago

Old news ;)

alangibson 4y ago

The textbook story about banks taking in deposits and lending some of them back out hasn't been true in modern economies for a long time. Banks don't need deposits to make loans. It's a long story, so I always recommend going down the Modern Monetary Theory rabbit hole.