Should we be scared of zero reserve banking?

[NotATether]

I read online that a few months ago that the Federal Reserve moved all banks from a fractional reserve system to a zero reserve system. In theory this means that banks now don't need to have any reserves, whereas before they had to have a percentage of their deposited money availabe as cash reserves.

Now it's practically impossible to sway many people at once to move their money off of banks because they will do everything they can to keep you as as a customer keeping your money in their bank. And they do this because they themselves can't survive everyone withdrawing their money at once (and the fractional reserve was like 10% before which wasn't much better, but I'm sure 10% of all customers wouldn't withdraw their money at once), now if even several people withdraw enough money, it will either go bust, like Lehman Brothers in 2008, or it's going to be bailed out with a loan financed with taxpayer money. And where will they get the money to repay the loan? By deceiving naive clients to buy bank products they don't need. So now that money they deposited that isn't really there, even that money gets depleted.

The entire situation is grim and fundamentally flawed, and this news doesn't change anything except for giving banks a larger risk of becoming illiquid. It's not "Fed saves the day for banks" news either. Think of it as a metaphor of price where it broke a support and continues to dump.

You don't even own part of your money anymore, you own none of it, and how are people going to adopt bitcoin en masse if banks can't sustain moving money out of them?  Banks own your money, which they don't even have.

Supplimental reading: https://medium.com/navigating-life/we-just-went-from-fractional-reserve-banking-to-zero-reserve-banking-and-its-a-pretty-big-deal-c501432e9be6

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[jackg]

The the average person the whole banking and cash system doesnt look great...

The systems aren't at cost of the tax payer and as you said have been sanctioned by the FED. The government doesn't pay for stuff with taxpayers money it just supplements itself with it - printing money to banks is not a cost to the taxpayer it's a wealth tax on those holding cash.

I'm not sure of the protocols for banks current reserves (previous were around 3% so we may find out again soon) but loans are already priced into the market from the point they're taken imo.

[Lucius]

From the position of a bank client, I must say that I have very little or almost no trust in banks - especially when I know what kind of scandals they have found themselves only in the past ten years. I must also say that I do not like that as a long-term client of the bank I have to go to the bank from time to time to prove that I am not a person who has anything to do with terrorism or money laundering. Therefore, I will soon close all my bank accounts, except for one that I need and for which no one has yet asked me to justify its existence.


Regarding zero reserve banking, this is related to USA banks and I think it’s a stupid idea that creates even more mistrust among bank users. I can't say if such a system is already in place somewhere in the world, but it is possible that some other countries will copy it in the future.

Money in banks, crypto on exchanges, stocks on the stock market - you wake up one morning and everything is gone except Bitcoin in your well-protected wallet

[Ucy]

You don't even own part of your money anymore, you own none of it, and how are people going to adopt bitcoin en masse if banks can't sustain moving money out of them? Banks own your money, which they don't even have.

Supplimental reading: https://medium.com/navigating-life/we-just-went-from-fractional-reserve-banking-to-zero-reserve-banking-and-its-a-pretty-big-deal-c501432e9be6

Didn't understand the bolded well
I guess that also means:  "how are people going to adopt bitcoin en masse if banks can't tolerate or allow them moving money out of the banks?"
Assuming this^ is correct, I think a sustainable decentralized Bitcoin ecosystem or economy will help greatly. Just build them and invite people to work and earn Bitcoin rather than depending on fiat monies to grow the Bitcoin economy.

[bits4books]

Sure.
In principle, I think that banks should have >90% reserve and when it comes to completely canceling the necessary reserves... this is too much.
It will be very sad to watch the fall of banks in case of force majeure - but I will not feel sorry for the banks. I will feel sorry for people who put their earnings in such banks.
But now you can clearly understand where the banking system as a whole is going, turning from a reliable (at least a little) safe into a cellophane bag with knives.

[Upgrade00]

if even several people withdraw enough money, it will either go bust, like Lehman Brothers in 2008, or it's going to be bailed out with a loan financed with taxpayer money. And where will they get the money to repay the loan? By deceiving naive clients to buy bank products they don't need. So now that money they deposited that isn't really there, even that money gets depleted.

From what I understand of fractional reserve, the banks are obliged to keep a percentage of deposits in reserve while the remainder can be loaned out to other people, these loans would be sold out if there is a mass withdrawal;
• So, if I deposit $500 and the bank uses a 10% reserve policy, then $50 is stored in the bank while the remainder can be loaned out.
• If this is spread among 10 customers, the banks have $4,500 to give out while keeping $500 in reserve.
• The $4,500 which is loaned out incurrs an interest, this is the profit the banks make. If an interest of 5% annually is used, the banks should receive $4,500 + 225 = $4,725 at the end of the year. This could be split between 12 months at a rate of $393.75/month.
• The $4,500 loaned out is the liability the banks owe customer who deposited, while the $393.75/month loan interest is their asset.

In a situation where depositors withdraw more money than was kept in reserve, the banks would be forced to sell loans at a loss to other banks to raise money, this would not involve tax payers money.
During a synchronized bank run, or huge defaults on loans meaning losses for banks, they could fall back to the central bank as the lender of last resort, more money could then be printed to keep banks afloat. Even though tax payers money is not involved, the system (which is a lot more complicated than this) is still flawed and has been plagued with a huge number of crisis over the years in many countries.


The decision to remove reserve policy could be an indicator of the situation in the economy; it's usually done to improve the money in circulation and to make loans available.
This could be one of the last cards the banks have to play inorder to salvage the economy, while putting them at high risk. So I would say, Yes, zero reserve policy is scary.

[Harriti]

with zero reserves it is a disaster. When banks open, they must have reserves to prevent when the economy collapses or encounter some risks, they can still compensate. That is why central banks are so important. Bank reserve levels will also affect the economy much, so they need to calculate it properly. Too much reserve is also not good and without it would be a disaster, so we need to be careful with banks with low reserves.

[hugeblack]

Banks derive their financing from two sources, the first is the central bank and the other is the reserve that the bank must keep + what clients deposit or withdraw during a period of time, say, for example, a day or a month.
We have a health crisis that caused the printing of a lot of money, so instead of borrowing from the central bank, the banks have the right to use their reserves for financing, but I think that there will be a huge package of supplies that the central bank will provide to these banks, so 10% will not pose a risk.

The next crisis will not come from the banking market, but rather the real estate markets or technology stocks, whose explosion will cause a global disaster.

[Mauser]

with zero reserves it is a disaster. When banks open, they must have reserves to prevent when the economy collapses or encounter some risks, they can still compensate. That is why central banks are so important. Bank reserve levels will also affect the economy much, so they need to calculate it properly. Too much reserve is also not good and without it would be a disaster, so we need to be careful with banks with low reserves.

I agree with you, without reserves the banking system will be doomed. The risk of the banks becoming unhealthy again is very big. We need central banks to regulate commercial banks and their deposit in relation to risky assets. With the financial crisis in 2007/2008 and european sovereign crisis in early 2010s we all remember how excessive risk taking by banks looks like. If the central banks start now to relax the regulations we will get another financial crisis in 5 years down the road.

[exstasie]

The next crisis will not come from the banking market, but rather the real estate markets or technology stocks, whose explosion will cause a global disaster.

They're all tied together. A real estate crash would directly reduce banking capital and liquidity by devaluing the real estate assets held by banks. It would also threaten banks with exposure to the mortgage lending industry. The fate of many investment banks is also tied to the stock market, including the tech sector. SoftBank is a recent example that comes to mind:

Just when investors thought Masayoshi Son was reining in risk at SoftBank Group Corp., the Japanese billionaire’s foray into highly leveraged derivatives is giving them fresh reason to worry.

SoftBank shares tumbled 7.2% on Monday in Tokyo, erasing about $9 billion of market value. The drop came after the conglomerate made massive bets on high-flying technology stocks using equity derivatives -- and despite one report that it has billions in paper gains.

Son’s career has been full of head-scratching acquisitions and strategic shifts, but the 63-year-old had spent much of this year taking investor-friendly steps that made it seem he was finally listening to shareholders like activist Elliott Management Corp. His latest move touched off concern that SoftBank is embarking on another risky endeavor that could lead to losses like those it suffered on office-sharing startup WeWork. Son himself is leading the options trading with a small staff that executes his ideas, according to people familiar with the matter.

“Son is a speculator -- not this visionary everyone claims he is,” said Amir Anvarzadeh, a market strategist at Asymmetric Advisors in Singapore who has been covering SoftBank since it went public in 1994. “This is yet another proof of that, as he is never too far from the action when a bubble is formed.”

SoftBank disclosed in August that it was establishing an asset management arm to trade public securities and mentioned it could use derivatives. What has alarmed shareholders is that Son appears to be using options to amplify his exposure to a corner of the market where valuations have soared and mercurial individual investors are playing an ever-greater role. SoftBank hasn’t disclosed details of its trading and the company declined to comment for this story.

https://finance.yahoo.com/news/softbank-big-options-bet-tests-230000396.html

[mindrust]

Wasn't that always the case since they broke the dollar-gold peg? What reserves they had before to back their FIAT? More FIAT? Oil maybe?

It is all going down anyway.

[dothebeats]

As someone who have some few bank accounts each with something in them, this makes me uneasy. The gravity of this, should the worse comes to worst, is severe that it can turn into a full-blown economic depression with every sector in the economy affected. The banks wouldn't be held liable should a crash happen, and the users' money will just flow down the drain as if it wasn't theirs to begin with. That's why as much as it's a dumb thing to do as per my colleagues and my family, I've gone long into bitcoin and just kept whatever money I need in cash, and don't deposit money to my bank accounts anymore. No one can talk me over that decision, now that there isn't something I can recover should the banking system fail soonest.

[hulla]

The Federal Reserve moved all banks from fractional reserve system to zero reserve system is ridiculous. According to my research, the United States was extensively volatile in terms of economic before the implementation of the Federal Reserve and the implementation of zero reserve systems may lead to panic, national currency more devalue and a lot of investors may decide not to take the risk.
But, I don't understand why the government makes some decisions that could collapse the whole country.

[posi]

Wasn't that always the case since they broke the dollar-gold peg? What reserves they had before to back their FIAT? More FIAT? Oil maybe?

It is all going down anyway.

I once read an article on Investopedia that stated "Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it." And with the new zero reserve banking can we say all the federal reserve claimed by the government are just lies created not gi make people scared.

[adzino]

I once read an article on Investopedia that stated "Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it." And with the new zero reserve banking can we say all the federal reserve claimed by the government are just lies created not gi make people scared.

Fiat paper currency has always been like that. It isn't backed by anything but the government itself. The piece of paper has a value just because we all "believe" that it has value, but in reality it is just a piece of paper. Since it is backed by the government, they have total control over the currency and the economy. One small mistake by the government and they can ruin everything by making the piece of paper worthless.

[ChiBitCTy]

1000% we need to be worried about this.  As a citizen of the United States I'm currently scared out of my mind for the troubles that we are putting our self in.  Take a look at the United States national debt.  It has skyrocketed, essentially doubling since Trump took over the office of President.  Trump also removed the reserve laws that Obama had put in place for large financial institutions, which is a very scary proposition. That's part of the reason the stock market continued it's strong decent when Trump one.  Sure it's a great thing, short term.  Long term I fear these institutions as well as the fed reserve are going to get in over their heads and not be able to payout monies owed to their customers.

[The Sceptical Chymist]

From the position of a bank client, I must say that I have very little or almost no trust in banks - especially when I know what kind of scandals they have found themselves only in the past ten years.

Nor do I, and I clearly remember the banking crisis of 2008-09 and the recession that followed.  The US government was making banks do "stress tests" after the bailouts to make sure they were capitalized enough to survive shocks to the system, i.e., to prevent another debacle that those toxic, dumb, but extremely popular mortgage products created in the first place. 

It's bewildering to me why the same US government would now allow banks to have a zero reserve requirement, unless the FDIC insurance money is just going to get printed by the Fed as needed.  The United States has gotten used to creating money out of thin air without riots happening in the streets because of it, so maybe that's their plan.

I'm no economist, but from my understanding of what fractional reserve banking is, I think this is a bad move that's probably going to have serious consequences somewhere down the road.  The scary thing is that I'm not sure the people in charge of all this are thinking about anything that's down the road.

[d5000]

There are a lot of misconceptions about banking in general. Exemplary I will comment some of the inaccuracies in the following post (which nevertheless is one of the best contributions in this thread).

From what I understand of fractional reserve, the banks are obliged to keep a percentage of deposits in reserve while the remainder can be loaned out to other people,

This is only partially correct, because in most cases there is no cash deposit involved. A more correct formulation is that "the bank must own X% (the reserve rate) of central bank money* - which can be cash or a loan from the central bank - for each dollar/euro/whatever existing in the bank's accounts".

To show the difference: Often people create an account at a bank and transfer money from another bank account to it. To "back" this money according to the fractional reserve rate, the bank must then acquire X% of central bank money - but only if there is not an equivalent movement of funds to another bank.

Often these movements all "equilibrate" themselves because there are much more transfers between bank accounts than cash withdrawals.

Now to loans: a loan doesn't mean that the bank "gives out cash" to someone, but it credits the required amount to an account in the same bank. This again means that the bank must acquire central bank money of X% of the loan - again, if there are transfers to other banks for the same amount, there is no need for it.

After the amount is credited to the customer's account, several things can happen:
1) The borrower can use the money to pay someone who has money at the same bank. This means that once the bank has ensured it owns the central bank money to "back" the loan, no more central bank money is needed.
2) The borrower pays someone who has money at another bank. This case is the most frequent one. This means that the bank actually can reduce the reserves (if there are no transfers for the same amount towards the bank) but its liquidity is reduced.
3) The borrower extracts the money as cash. This is relatively uncommon. In this case, the bank has to acquire again, more central bank money, as the cash amount reduces the bank's reserves.

In a situation where depositors withdraw more money than was kept in reserve, the banks would be forced to sell loans at a loss to other banks to raise money, this would not involve tax payers money.

There can be two different situations:
- If users "withdraw cash", they need more central bank money. What they would normally do is to increase their deposits at the central bank (=take another loan from the central bank).
- But if customers withdraw money to another banks, then the banks will have, once the transfer is cleared, actually less liabilities, and can decrease their holdings on central bank accounts. But they have also reduced their liquidity.

This could be one of the last cards the banks have to play inorder to salvage the economy, while putting them at high risk. So I would say, Yes, zero reserve policy is scary.

The author of the blog post - while not an economist, it seems - is correct: in March 2020 the fractional reserve system was abolished in the US by the Fed in its current form.

Is it scary? Well, at a first glance it might seem that yes - but I read that banks in the US, before the abolition of the mandatory reserve, actually owned an excess of trillions of dollars of central bank money. The Fed is paying interests for these reserves, and thus it gives incentives to banks to "park" money at the central bank. It seems that this is at least as effective than simply requiring 10%, or 3% (for smaller banks). So they may have thought that the minimum fractional reserve is no longer needed.

In Europe, for decades now, the required fractional reserve is as low as 1%. This doesn't limit, practically, loans given out by banks, and also in the Eurozone banks actually banks own much more central bank money than required by the ECB fractional reserve policy.


*Most of the time there is more "central bank money" deposited on the banks' accounts at the central bank, than the amount of cash they have available. To obtain these central bank loans the banks deposit securities and other assets, like bonds or stocks, at the central bank.

[mu_enrico]

Q: "Should we be scared of zero reserve banking?"
A: If about bank run. It depends on whether the banks can manage their reserve or not. Removing the requirement doesn't mean there will be an empty vault because banks still have to honor day-to-day withdrawals.

Reserve requirements are a tool used by the central bank to increase or decrease money supply in the economy and influence interest rates.

...

Reserve Requirements vs. Capital Requirements
Some countries don't have reserve requirements. These countries include Canada, the United Kingdom, New Zealand, Australia, Sweden and Hong Kong. Money can't be created without limit, but instead, some of these countries must adhere to capital requirements, which is the amount of capital a bank or financial institution must hold as required by its financial regulator.

Source.

The Basics of Capital Requirements
Capital requirements are set to ensure that banks and depository institutions' holdings are not dominated by investments that increase the risk of default. They also ensure that banks and depository institutions have enough capital to sustain operating losses (OL) while still honoring withdrawals.

Source.

The central bank wants to flood the economy with fiat at the moment to (artificially) move the economy; therefore, the high inflation rate is scarier than the risk of a bank run IMO.

[Wind_FURY]

If only some anonymous genius invented a ground-breaking, decentralized, self-sovereign currency that the government cannot control, and censor. I believe that would be what the world has to have right now.