Fractional Reserve System is what prevented a lot of banks from going under during the last recession.
Just imagine, if banks had chosen just to hold 2-3% reserves, how many banks would have failed.
I think you have more or less contradicted yourself. Banks need to operate on a fractional reserve system to survive, as if they cannot leverage their own money they would not be able to make enough money to pay their expenses. However if banks are over-leveraged then they will have a much greater chance of failing when the economy turn sour as it did in 2008/9.
Not really. The Fractional Reserve Requirement is what prevented banks from over-leveraging.
We should be thankful that their are standards in place.
There are many ways around the reserve requirements. Many banks used off-balance sheet vehicles that essentially allowed them to take on more risk then they should have. Also if the assets they buy with borrowed money decline in value significantly then the fact that they are only leveraged x to 1 does not matter because the equity will be wiped out.
And you are talking about only the legal ways. Looking at the 'settlements' major banks are making these days, I am sure some of them bent rules as well.
Banks are being strongarmed into paying billions to the government, and the governments claims do not have merit. The government also has been more or less forcing banks to reach multiple settlements over what is generally the same issue, but with only very minor differences multiple times.
