What is FRACTIONAL reserve ?
#askNostr
Discussion
Basically the banks not having all their depositor’s money.
But banks do have a balanced :-) Balance sheet .. sorry for adjective cuz the word literally means a balance ..
For example JPMC has four trillions in assets and around 3.75 in liabilities.. if they don't have all my dollars ..how do the balance it ?
They don’t hold 100% in liquid deposits, they loan out a portion to generate yield.
Obviously.. why would any one hold fiat .. they always hold interest bearing assets .. either private loans or TBills ..
Bank reserves bear interest now too, through IOR at the Fed. they use it as part of their toolbox in regulating the Fed Funds rate, alongside open market operations.
You just asked what’s Fractional Reserve and now you’re putting on an economics lecture. What’s the question? 😂
But "not holding 100 percent in liquid cash"
.. is not what fractional reserve system means ..
That is my point ..
You’re saying what people think fractional reserve banking means isn’t really what it means?
Yes .. I think there was a video ..that started this myth that banks are lending 100 percent of what we deposit ( which is true) ..and then repeat ..thus creating money out of thin air .. and it was named Fractional Reserve banking ..
Totally unconnected ..
Sometimes incorrectly assigned terms just stick and become widely accepted.
We need easy short hand to fit a definition. 🤷♂️
It's accounting magic. When they lend out your deposit they debit cash and credit accounts receivable. It's all fine until those AR's default and become written off. Then they can just credit their bad debt account and write off a debit on their AR. There's no incentive to fix this since they can take a tax deduction on their bad debts.
Yes .. but how much bad loans are there .. besides they pay hefty insurance to cover 250 K and less depositors ..
Plus it is the question of business .. if they make bad loans , they will ultimately fail ..
Bailouts. They are "too big to fail" so they dgaf.
Too big to fail is bad for any sector ..but question was what is FRACTIONAL reserve :-)
For example Verizon is too big to fail .. so is ATT .. so is Google or Apple ..
"Too big to fail" is a reference to the 2007 US banking crisis when the housing bubble popped and too many people defaulted on their subprime mortgages. They couldn't repay their loans to the bank. This had a cascading effect because the banks didn't have enough cash reserves due to overleveraged debt and fractional reserve banking policies. When depositors panicked and tried to withdraw cash, there was no money. The entire shadow banking system was built on rehypothecating debt so everything collapsed and the US went into a major financial depression. The debt system is like a huge jenga tower and the fractional reserve system backing all the liquidity was the bottom block pulled out by the housing bubble pop. The banks went bankrupt but were deemed to be "too big to fail" and were subsequently bailed out by taxpayer money.
This has all happened before (very recently) and no lessons were learned by those at the top.
A fractional reserve means they only have to hold a fractional portion of deposits people make in their liquid reserves.
That fractional reserve policy is currently set at 0% meaning they have to hold at least 0% of deposits as liquid cash 🙄. Banks no longer have to actually have on hand any cash deposits. They can risk/lend out the entire balance in an attempt to earn a yield with your money.
Beg to disagree .. fractional reserve system means they need to hold a percentage with Fed .. for example JPMC has around .25 trillion deposited with Fed ..
This deposit determines interbank landing rate .. we can go in detail as to how it works but that is what target fund rate is ..
And that is where the name comes .. fractional reserve ..
Short term ( overnight ) interbanks lending rate ..
More detail please?
Okay ..so let's for example sake , every bank need to put up 1 percent of their deposits to Fed .. it is sometimes called high power money .. now if bank A 's daily deposit go down , they can reduce their reserve , and bank B s deposit increase then they need to increase their reserve .. means there is a transaction between the two banks .. Fed provides a target lending rate .. normally called Fed fund rate .. that is what Fed chair announces when he claims to cut the interest rates ..
As a side - This interbank lending rate has very little impact on long term T bills ..
Since only a small fraction of needs to be kept with reserve ( or central bank ) , this system is called Fractional Reserve system ..
As regards to how much a bank lend out as loans ( assets ) or keep in T bills ( assets ) is totally upto banks .. if they make good loans .. and balance the sheet with deposits they receive ( liabilities) they are good .. in effect they can't lend more than the total deposits ..
Means JPMC can lend only 4 trillion minus the reserve money . .. btw it is not a bad idea have little more assets than liabilities..hope this is clear .. so the idea that banks print money out of thin air is not entirely true ..
Now of course with such a manual system and dated technology..there are always systemic failures .. and too big to fail is a universal problem ..sadly (:-
Now ..of course deposits baloon out .. because let's say a bank makes a million dollar loan .. the normal practice is to send the money directly to seller through an escrow .. as in case of a home mortgage .. but the seller .. so that money doesn't come immediately back to borrower account ..
But seller will obviously deposit money for short term in his bank ( till he acquired a replacement asset ) .. this has kind of multiplier effect on money supply ..
That is why Fed needs to either inject liquidity or tighten the money supply to control inflation .. to their 2 percent target ..
Btw ..this control function is extremely important.. why #bitvoin can never be a currency is it is a volatile asset .. unless you have mechanism to QT or QE ... There is no way to stabilize the prices during a supply chain shock .. this is a market function that needs to be developed over bitcoin ledger if the intent is to have it behave like a currency ... Besides it has to tax free in transactions
When you deposit money in your Bank they can lend them to someone else, up even to 90% making profit from it.
The person that borrowed money now has money in his bank account, and imagine is a different bank, 90% of those money can be lend to someone else.. and so on.
Banks have obligation to maintain just a fraction of the money you put in your bank account. It's a huge rabbit hole when you understand there's no money in First place, it's all debt.
There's no money? !
I thought that they can lend out 100 percent is US .. are you sure it is 90 % ?
But how does that matter ? If ..read the note below
I am not sure About US, but that wouldn't suprise me at all 😂
It doesn't matter indeed, it's just castel of paper digitalised IOU. More and more are finding it out.
Yup .. in US it is totally choice of bank to loan out as much as they want or put in assets like T bills. . but that is not what Fractional Reserve means ..
I think it means they need to maintain a fraction of their funds with Fed .. as their reserves go down or up .. there is interbank borrowing .. Fed sets up the rates for interbank lending .. called short term Target rates ...
Since Target rates are implemented only for a fraction of banks bank sheet , it is called Fractional Reserve system ..
It has nothing to do with how much or not banks may lend out ..
Did it make sense ?
It has to do on how much banks can use deposits in order to do whatever they want to, from lending to buy Tbills or anything else.
At least here Riserva Bancaria Frazionaria, is that portion "fraction" of reserves that banks must take and save in Central Banks to avoid risks. So 1% is what they must to save, the rest they can lend and or buy bills or bonds.. lol.
Exactly.. that is what Fractional Reserve means .. central banks use it to determine short term interbanks lending rate ..
Most people think fractional reserve means that banks can loan out all my money .. and that is like a crime or something.. no .. as long as they have balanced balance sheet .. and audited .. it is all fine ..
During covid they quietly amended the rules so it is now a 0% reserve requirement.
The dollar's you deposit are already backed by nothing and the deposits you make aren't even in the bank. You'll own nothing and be happy.
Damn! Missed this about the US, and just went to check, in Eu (Italy precisely, maybe different somewhere else) you need now ONLY 1%, from 2% it was before..
LOL!
It's insanity and completely irresponsible policy in the name of artificial growth via debt.
nostr:npub1zzmxvr9sw49lhzfx236aweurt8h5tmzjw7x3gfsazlgd8j64ql0sexw5wy summed it up the best:
Reserve requirements in the US have been zero for awhile now. But yes,they used to need cash.
They do at least have asset requirements still. Just not cash anymore.
Plus they need to maintain a reserve at Fed ..
Exponentially creating money and balance sheet expansion. If I’m not mistaken, there is currently NO reserve requirement for banks to create//make ‘money’
Just like any other business , banks need to have a balanced balance sheet ..
Loans , reserve at Fed , and T bills as assets on one side - and deposits as liabilities on the other side ..
As long as a bank has healthy balance sheet , it is a legit business .. besides ton of other regulatory requirements ..
Just the way , a car business creates cars and their inventory is treated like an asset , for a bank the product is the loan they issue .. just the way a car can be good or bad , a loan can also be a good loan and bad loan .. banks with good loans succeed ..
And the ones who lend to shitcoin companies and help create your yo coins fail :-) ..just a jab 😔
fraction of zero reserves. Make it make sense. Non real numbers…