4 ms·

> That means that the bank might not be able to pay out all the money they owe if a large percentage of the depositors all at once request their deposits return

by lowkey 4y ago

> That means that the bank might not be able to pay out all the money they owe if a large percentage of the depositors all at once request their deposits returned. It isn’t that large a percentage of deposits - less than 20% for most banks by my estimate. Notably in 2020 the Federal Reserve reduced the required reserve ratio for banks to zero, though they do have other requirements such as a minimum equity ratio and such. The reality is that fractional reserve banks have a massive failure mode if even a modest percent of demand accounts were to withdraw in a short period. My sincere hope is that these recent developments raise awareness for how fragile the current system is and there is enough public outcry to effect meaningful change. As it stands a checking or savings account at an FDIC insured bank is an unsecured loan to a leveraged counterparty that uses your funds for speculation, backed by an insurance program with $142 billion protecting $17 Trillion in deposits. (0.7% coverage) If the FDIC fund is insufficient in a crisis either the US Taxpayer or all dollar holders will be left holding the bag.

prottog 4y ago
Back when people agreed that shiny rocks are a good medium of exchange and store of value, it made sense for them to pay banks to hold on to their money. It was impractical to hold large amounts of physical material under your mattress; it's a big theft risk, as well as just taking up room. So there was economic value in a specialized entity that would safeguard your wealth, i.e. a bank. And banks didn't have to speculate with their deposits, since they were already being paid to be custodians. Now that the medium of exchange and store of value is fiat currency that is digitally printed or burned by the Fed, it's the opposite. Most transactions happen with nothing physical changing hands. The marginal cost of a bank to take on more deposits is nothing. It's no longer natural for banks to be paid by depositors directly as custodians, which is why they have to make money elsewhere; as you said, leveraged (but regulated) speculation. We've decided that this is overall a good thing for society. > backed by an insurance program with $142 billion protecting $17 Trillion in deposits This part's kind of misleading, since it's not like all $17 trillion (or even some significant part of it) will leave the US banking system entirely. Almost all of it just goes from one bank to another. When too much leaves one particular bank at once, you get a bank run. But the system as a whole remains balanced, and there's no conceivable scenario where enough people will take money out of the banking system for it all to crumble. Where would the money go, under people's mattresses or other currencies?
- lowkey 4y ago
  I fully agree with you on all points. I’ve been thinking about your last point about where would the money go. Even if it was used to buy Bitcoin, for example, the money wouldn’t actually ‘leave’ the system. I do find this confusing in a way - need to think about it some more.
vlovich123 4y ago
> reduced the required reserve ratio for banks to zero, Isn’t this only for smaller banks? if I recall correctly something like banks with a market cap over $500B have to maintain a proper reserve ratio.
- lowkey 4y ago
  Not according to this statement from the Fed itself. It applies to all depository institutions. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm

by lowkey 4y ago

prottog 4y ago

Back when people agreed that shiny rocks are a good medium of exchange and store of value, it made sense for them to pay banks to hold on to their money. It was impractical to hold large amounts of physical material under your mattress; it's a big theft risk, as well as just taking up room. So there was economic value in a specialized entity that would safeguard your wealth, i.e. a bank. And banks didn't have to speculate with their deposits, since they were already being paid to be custodians. Now that the medium of exchange and store of value is fiat currency that is digitally printed or burned by the Fed, it's the opposite. Most transactions happen with nothing physical changing hands. The marginal cost of a bank to take on more deposits is nothing. It's no longer natural for banks to be paid by depositors directly as custodians, which is why they have to make money elsewhere; as you said, leveraged (but regulated) speculation. We've decided that this is overall a good thing for society. > backed by an insurance program with $142 billion protecting $17 Trillion in deposits This part's kind of misleading, since it's not like all $17 trillion (or even some significant part of it) will leave the US banking system entirely. Almost all of it just goes from one bank to another. When too much leaves one particular bank at once, you get a bank run. But the system as a whole remains balanced, and there's no conceivable scenario where enough people will take money out of the banking system for it all to crumble. Where would the money go, under people's mattresses or other currencies?

lowkey 4y ago
I fully agree with you on all points. I’ve been thinking about your last point about where would the money go. Even if it was used to buy Bitcoin, for example, the money wouldn’t actually ‘leave’ the system. I do find this confusing in a way - need to think about it some more.

vlovich123 4y ago

> reduced the required reserve ratio for banks to zero, Isn’t this only for smaller banks? if I recall correctly something like banks with a market cap over $500B have to maintain a proper reserve ratio.

lowkey 4y ago
Not according to this statement from the Fed itself. It applies to all depository institutions. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm