Should we be scared of zero reserve banking?

[exstasie]

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.

I assume it's to prevent a liquidity crisis in the banking system. Any lowering of the reserve requirement creates lending liquidity by definition, so it's one of the steps the Fed can take to prevent a 2008-type scenario. And yes I assume in the worst case scenario the Fed will just print more money and step in as the lender of last resort.

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[inoes]

What I'm afraid of is that banks can print money arbitrarily, because FED is privately owned. even though everything uses reports as an accountability but if the bank is without reserves then I better choose my gold which is clearly valued than a piece of paper.

[Salauddin1994]

I don't think there will be anything to fear from zero reserve banking if the banking system takes a much tougher line on money printing. Here the system of government must be correct if the legal system is good everything can be cured. There will also be a civil lawsuit in the Southern District Court of the United States to recover the reserve theft money and eventually prosecute the culprits. The lawsuit will be filed by a US legal aid agency appointed by the central bank.

[Argoo]

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.

I assume it's to prevent a liquidity crisis in the banking system. Any lowering of the reserve requirement creates lending liquidity by definition, so it's one of the steps the Fed can take to prevent a 2008-type scenario. And yes I assume in the worst case scenario the Fed will just print more money and step in as the lender of last resort.

I do not see any threat to the US banking system in the fact that they will not have sufficient reserves for their work. The entire banking system works as a single system and, if necessary, they can transfer funds from one bank to another rather quickly. For a country that has not secured its paper money for more than forty years, there is nothing unexpected in such a decision.

[wanted sliter]

How do they do when a bank has no reserves when customers withdraw large sums of money. I think this approach disrupts the way traditional banks did in the past. Looks like the way bitcoin works, without any reserves. But the problem is that they hold someone else's money, and no reserves mean no immediate liquidity.

[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.

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.

That's exactly what FIAT is. (most of hem anyway)

Money is money only if it is backed by real commodities. What is a real commodity? Most well known ones are Gold, Silver and Oil.

PetroDollar is kinda backed by oil actually but it is not really official like Bretton Woods and they can print whenever they want to which sucks. Still, if the USD has this much power right now, it owes this power to the petro dollar system.

[jostorres]

FED will always be there to defend those banks because they are the banks and they are the same people who used to be in those banks. You think FED is some place that is filled with human who hate banks or who are just natural towards banks?

Those are the people who have done CEO jobs at these banks, so if anything goes bad they would just print out money and help their friends out, that is why zero reserve banking is great for banks, they can work a lot better and make a lot more profits and can be a lot more risky with their investments but in the end if anything bad happens they know they will be saved.

Believe me, let couple banks bankrupt and hurt the economy a bit and things will be horrible for short term but in long term those banks will have to be much more careful and not hurt peoples economy.

[Febo]

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 available as cash reserves.

Does it really matters if you have few percent of what you lent out in your bank or zero percent? In both cases those are just numbers in a ledger and nothing else.

[beerlover]

Honestly it wasn't that perfect before neither, don't get me wrong this is even worse now, we are talking about a student getting 40 out of 100 back in the day and now getting 20 out of 100, he failed the class before and he is still failing, but at that point you really do not care what point you fail with as long as you got an F, which means if they really want to move to zero reserve they can do that, nobody would say anything because it makes no sense anyway.

What would be awesome is allowing banks only to deal with money they have, if they want to give out a loan, have that loan on reserves, if you want to buy shares of a company, have that much money and actually give them the money itself, not some digital number changes from one account to another. Long story short we just went from bad to horrible.

[AicecreaME]

Lowering the bank’s reserve to zero is really terrifying. It poses a great risk to the clients money deposited in the bank.

When we talk about zero bank reserve requirement, it means that the bank can produce money infinitely and lend it to whoever needs it. It may sound a very nice to the ears, as it can support the economy of a country, but it comes with a high consequence.

In zero bank reserve, the banks can let many accounts loan money as long as they can, without consulting anyone. It does benefit those lower class people that needs financial help. However, when the depositors want to withdraw their money, they won’t be able to do so because the bank don’t have the money on hand since they lended it to other clients. Here comes the disadvantage to those who entrusted their money to the banks. They can’t withdraw their money fully all at the same time because the bank will face bankruptcy.

This is scary especially if you’re entrusting all of your hard-earned money to a bank. When a crisis comes and you need a large sum of money, you can’t withdraw it in an instant regardless of how much you have in your account. This put the clients in an unfavorable scenario. Like what happened way back 2015 in Greece wherein they limited the withdrawal to 60 euros per account in a day.

[d5000]

Lowering the bank’s reserve to zero is really terrifying. It poses a great risk to the clients money deposited in the bank.

When we talk about zero bank reserve requirement, it means that the bank can produce money infinitely and lend it to whoever needs it. It may sound a very nice to the ears, as it can support the economy of a country, but it comes with a high consequence.

This is exactly one of the misconceptions I mentioned above.

Banks must stay liquid to operate. This means, if they lend money to "anyone", also those who don't present them proper backing/security, they risk that the loans are not paid back, and that they become illiquid and go bankrupt. Normally, this simple mechanism prevents banks to lend money to "anyone".

The problem is on two fronts:
- Errors in risk management - this led to the crisis 2007-09, because some financial products which should have been rated like trash were rated almost like state-backed bonds. Laws since then have been revised to prevent that problem. I doubt however it can be solved entirely.
- the "too big too fail" problem - if a bank is big enough it can speculate on the State always trying to save it from liquidity problems.

None of these problems can be solved directly by a mandatory central bank money reserve of 1% or even 10%. As I wrote above, a reserve requirement of 1% like in the Eurozone does not affect the loan activity of a bank at all. The 10% in the US was only valid for big banks, smaller banks had 3%. A 50% or 100% reserve would solve the problem perhaps, but lead to a ton of other problems (it would basically be a way back to a centrally planned economy, and thus extremely inefficient).

I see current banking as problematic, but not because they "can create money out of thin air", but more because of their weight in the financial system which could be much lower if Bitcoin and other cryptocurrencies were used instead of fiat. They're a sector of economy that is a bit like a circlejerk, and not really necessary (at least not in the current size). Thus I'm looking for ways to make Bitcoin an alternative to banks.