Comment by ianburrell
1 year ago
That is exactly what happens. Reserve ratio used to be 10%, same as your example. The reserve ratio is currently zero, lowered in 2020 during pandemics. But banks still can't lend out more than deposits.
1 year ago
That is exactly what happens. Reserve ratio used to be 10%, same as your example. The reserve ratio is currently zero, lowered in 2020 during pandemics. But banks still can't lend out more than deposits.
> The reserve ratio is currently zero, lowered in 2020 during pandemics.
I saw this during the pandemic, and it bewildered me how little coverage of it there was. How is this not going to cause another financial catastrophe? And if we're so sure it isn't, then what makes people think they under economics so well, given that they clearly thought a minimum was necessary just a few years ago?
> I saw this during the pandemic, and it bewildered me how little coverage of it there was. How is this not going to cause another financial catastrophe?
The banks in Australia, Canada, etc have had zero reserve requirements for thirty years:
* https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
The US had reserve requirements leading up to the 2008 GFC which started off with mortgages/loans, and yet those requirement didn't stop the disaster. Canada et al did not have requirements, and yet it didn't have a financial meltdown (not itself, only as 'collateral damage' to what happened in the US).
Many central banks like the Bank of England don't even have a reserve requirement and rely on the bank rate to control it instead.
The equivalent for the USA would be the Federal Funds Rate, I suppose. The reserve requirement is just one tool among many.
Because what matters is _Capital_ requirements, which differ by the _risk_ of the loan. A bank's Capital is what limits their ability to lend. Reserve requirements are irrelevant in the modern banking system.
Technicaly not accurate:
the do lend out more than they have _currently_ as deposits on their central banking accounts, you have to care about "duration transformation" - JPM has billions of loans and deposits, though most of the deposits may be currently "out of the house" (borrowed) Now, for sure could JPM increase the balance sheet even more by another loan, if they still meet whatever balance-sheet-restrictions and if they have enough money on their central banking account. (sure, if the loan is for a customer within the same institution, then there is no difference)
Deposits≥Loans is a tautology since every time loans increase, so do deposits. It doesn't mean anything or provide any insight.
Even deposit liabilities matched by deposit assets in other banks are essentially inter-bank loans. That is, deposits=loans in all cases.
I deposit $20. Deposits: $20. Loans: $0. Cash: $20.
Fortunately, loans create deposits, so they are always in balance.