Bank excess reserves are so massive- why aren't they lending to everyone?

[mcplums]

https://en.wikipedia.org/wiki/Excess_reserves#/media/File:EXCRESNS.png

Excess reserves, to my understanding, are the reserves beyond which a bank needs to comply with regulations.

It acts as a 'cushion' against loan defaults and people withdrawing deposits.

So it seems to me that excess reserves are SO huge now that a bank can safely have a huge chunk of its loans default and a huge proportion of its depositors withdraw their money in cash and they will still be solvent. Just look at that graph!

So why aren't they offering loans to everyone, no questions asked?

Also what incentives to banks currently have to take appropriate credit risks with such huge reserves?

[suda123]

https://en.wikipedia.org/wiki/Excess_reserves#/media/File:EXCRESNS.png

Excess reserves, to my understanding, are the reserves beyond which a bank needs to comply with regulations.

It acts as a 'cushion' against loan defaults and people withdrawing deposits.

So it seems to me that excess reserves are SO huge now that a bank can safely have a huge chunk of its loans default and a huge proportion of its depositors withdraw their money in cash and they will still be solvent. Just look at that graph!

So why aren't they offering loans to everyone, no questions asked?

Also what incentives to banks currently have to take appropriate credit risks with such huge reserves?

there baiting a lot of regards with the interest rates then they flip it into negative

[HostSurf]

It would create a huge debt to everyone who doesn't have a stable income. Some won't be able to pay the bank back.
All it would do is just create more debts to people when this can be prevented. Banks wants to make profits off the interests that people pay back to the banks. If someone doesn't have an income to pay all that back then the bank is not making any profits.

[n2004al]

https://en.wikipedia.org/wiki/Excess_reserves#/media/File:EXCRESNS.png

Excess reserves, to my understanding, are the reserves beyond which a bank needs to comply with regulations.

It acts as a 'cushion' against loan defaults and people withdrawing deposits.

So it seems to me that excess reserves are SO huge now that a bank can safely have a huge chunk of its loans default and a huge proportion of its depositors withdraw their money in cash and they will still be solvent. Just look at that graph!

So why aren't they offering loans to everyone, no questions asked?

Also what incentives to banks currently have to take appropriate credit risks with such huge reserves?

The reserves are different from country to country and not at the same amount during all the time. Those are greater when the financial situation is not sustainable or not enough and are few when the situation in question is much more sustainable and the economy much more strong. Normally are product of various calculations and predictions and not an amount created only by one person and because someone can tell that must be this or that figure. So it is a variable which depends from other (economic and financial) factors and not an amount that can be decided from the human will. As such after decided how much will be cannot used. Until an another decision which, if reduce the amount, allow the use of the amount liberated. This can be the only way of the use of those.

[Slark]

Banks are not lending money to everyone with no question asked, because in the long run it would cause them more loss than profit. If you are eligible person to lend money from a bank you will most likely will be able to pay it back. But if you, say - are unemployed NEET with not source of income, chances are that you will never pay them back. No amount of bank reserves gonna change that credit policy.

[Magnr]

https://en.wikipedia.org/wiki/Excess_reserves#/media/File:EXCRESNS.png

Excess reserves, to my understanding, are the reserves beyond which a bank needs to comply with regulations.

It acts as a 'cushion' against loan defaults and people withdrawing deposits.

So it seems to me that excess reserves are SO huge now that a bank can safely have a huge chunk of its loans default and a huge proportion of its depositors withdraw their money in cash and they will still be solvent. Just look at that graph!

So why aren't they offering loans to everyone, no questions asked?

Also what incentives to banks currently have to take appropriate credit risks with such huge reserves?

Joe here, founder of Magnr.com, I worked in both retail and investment banking in financial regulatory reporting so here's the facts from someone who has industry experience:

You are right in your basic understanding of what a capital reserve is. In banking we use the term Tier 1 capital to describe highly liquid cash held at the bank that is available for immediate deployment for scenarios where depositors want to withdraw etc.

Banks and Investment Banks across the world tend to follow standards set out by the Basel accords. The Basel accords are defined by the Bank for International Settlements which essentially guides regulatory frameworks for central banks around the world.

Basel III (three) is the current standard and provides guidance on how much capital a bank should retain as highly liquid Tier 1 capital. As you might expect, financial regulation is a very slow moving beast, wikipedia tells me that the third revision was defined in 2010 and is set to come into completion by 2019.

https://en.wikipedia.org/wiki/Basel_III#Capital_requirements

Here's where the huge controversy lies and the main point of debate AGAINST fractional reserve comes from. Basel III, the latest standard states that a banking institution should hold 4.5%, YES, you read that correct 4.5% of highly liquid cash with a buffer of 2.5% against its balance sheet.

So you might think that the numbers on your graph are huge. In reality, they are tiny.

Next time you visit your bank, just remind yourself, whatever your bank balance shows, 93% of the cash you deposited, isn't actually there....

( Disclaimer, financial regulation is very very very complex, what I wrote above is a simplification of what actually happens, if you want to know more, start here: https://en.wikipedia.org/wiki/Basel_III )

[ajareselde]

If they would to lend to everyone, then the value of the money would be in devaluation. The very value of anything is based on supply and demand, and if you
eliminate that demand by lending it to everyone, you would create a temp. supply overflow, and they don't want to do that.
There's also the fact that you would not lend your bitcoins to someone who has not enough in collateral, for example.

[mcplums]

Here's where the huge controversy lies and the main point of debate AGAINST fractional reserve comes from. Basel III, the latest standard states that a banking institution should hold 4.5%, YES, you read that correct 4.5% of highly liquid cash with a buffer of 2.5% against its balance sheet.

So you might think that the numbers on your graph are huge. In reality, they are tiny.

Thanks for your reply buddy but I don't understand the bit I quoted. Surely once you take into account the 4.5% the numbers are even larger? Because it means they can lend (excess reserves) / 0.025? Which is ridiculously massive!?

[countryfree]

Excess reserves?

Banks do not have enough reserves! Haven't you heard about fractional reserve? When banks give a loan, they are creating money out of hot air. The reserves they're keeping are barely a few percents of the money they're lending. That's why so many people like BTC, because it was designed without the possibility of fractional reserve, or wild money creation.

[jaysabi]

https://en.wikipedia.org/wiki/Excess_reserves#/media/File:EXCRESNS.png

Excess reserves, to my understanding, are the reserves beyond which a bank needs to comply with regulations.

It acts as a 'cushion' against loan defaults and people withdrawing deposits.

So it seems to me that excess reserves are SO huge now that a bank can safely have a huge chunk of its loans default and a huge proportion of its depositors withdraw their money in cash and they will still be solvent. Just look at that graph!

So why aren't they offering loans to everyone, no questions asked?

Also what incentives to banks currently have to take appropriate credit risks with such huge reserves?

There is great harm caused by loaning money out if it can't be repaid. Just because banks are sitting on huge reserves doesn't mean they throw profit motive out the window. They don't loan money to anyone they don't believe will be able to repay the loan. Basically, you're asking why aren't banks being more reckless, and the answer is 2008.

[jaysabi]

Excess reserves?

Banks do not have enough reserves! Haven't you heard about fractional reserve? When banks give a loan, they are creating money out of hot air. The reserves they're keeping are barely a few percents of the money they're lending. That's why so many people like BTC, because it was designed without the possibility of fractional reserve, or wild money creation.

Excess reserves above what is statutorily required. That's the key point.

[johnyj]

https://en.wikipedia.org/wiki/Excess_reserves#/media/File:EXCRESNS.png

Excess reserves, to my understanding, are the reserves beyond which a bank needs to comply with regulations.

It acts as a 'cushion' against loan defaults and people withdrawing deposits.

So it seems to me that excess reserves are SO huge now that a bank can safely have a huge chunk of its loans default and a huge proportion of its depositors withdraw their money in cash and they will still be solvent. Just look at that graph!

So why aren't they offering loans to everyone, no questions asked?

Also what incentives to banks currently have to take appropriate credit risks with such huge reserves?

All of these money are printed by FED after 2008 crisis, and large banks successfully sold their crashing assets to FED in exchange for these money

However now they have a big problem: FED printed 5x more money but there are no 5x more products and services in society, in fact maybe less and less due to average people's income is dropping. So if they start to spend these money or loan them out, there will be a hyperinflation that raise the price of almost everything more than 5x, thus make the USD worthless

So in order to maintain a low inflation level and keep the credibility for their money, they won't let those money out, for decades to come. In fact the inflation for capital goods is already sky rocketing, that's the reason FED start to raise the interest rate

[Magnr]

Here's where the huge controversy lies and the main point of debate AGAINST fractional reserve comes from. Basel III, the latest standard states that a banking institution should hold 4.5%, YES, you read that correct 4.5% of highly liquid cash with a buffer of 2.5% against its balance sheet.

So you might think that the numbers on your graph are huge. In reality, they are tiny.

Thanks for your reply buddy but I don't understand the bit I quoted. Surely once you take into account the 4.5% the numbers are even larger? Because it means they can lend (excess reserves) / 0.025? Which is ridiculously massive!?

The cash that is held (the 4.5% and i guess the 'excess' 2.5%) is not enough when the economy takes sharp dips. The credit crisis of 2008 and the following global financial crisis was caused mostly by banks not having enough cash. This is why they then go and talk to the central bank to ask for bonds (another form of highly liquid cash). The reason is that when economies and banks collapse, people want to withdraw their money and life savings FAST!

This happened in the UK to a bank called Northern Rock. It was a big bank that took a lot of mortgages. When the crash happened, everyone using the bank went straight to the branch and demanded full withdrawals.

Slight exaggeration here; if 100% of all your depositors ask for their cash back, and you're only holding 7% (4.5+2.5%) of it, then you can see where the problem lies. That cash which is excess, is no longer excess, it never was in the first place.

The term 'excess reserves' is misleading. Perhaps it should be called 'excess over and above the minimum requirements set out by regulators' which in reality is tiny.