Comment by itsoktocry
1 year ago
>Banks can lend up to an allowed multiple of their cash or equivalent reserves
And what is the current reserve requirement in the US? Zero.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Edit: Whoops, someone beat be to it below.
The important part is:
> and in the Basel era are also regulated on the ratio of their capital reserves to their loans
Reducing the reserve ratio to zero doesn't mean that banks can create unlimited amounts of money out of thin air. It just means that regulation by capital requirements has now fully superseded regulation by reserve ratio.
In theory those capital requirements are a better and finer-grained regulatory tool, capturing the different risk of different classes of asset. In practice that can fail--for example, the SVB collapsed insolvent because it was permitted to value bonds above their fair market value if it claimed they'd be held to maturity. That failure was in the details though, not the general concept.