Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

The Board reduced reserve requirement ratios to zero percent effective March 26

federalreserve.gov

Post reply on HN
Print view View original

71–80 of 99 posts

Re: The Board reduced reserve requirement ratios to zero percent effective March 26

#71

Post by Loughla »

mech1234 wrote: post #17
cabaalis wrote: post #13

I am no economist. What is being solved here? Allowing loans? Who will take out loans in the economy as it is? I'd think a reserve at the banks is a good protection of solvency, and should be increased instead of decreased. Is my layman interpretation completely wrong? It feels like they ran out of bullets and have thrown the gun.

Typically, For every dollar a bank "keeps" in your bank account, they are allowed to loan out some fraction of the dollar. Let's say that this is usually 90 cents. The amount of cash your bank actually has on-hand is 10 cents. This process is known as fractional reserve banking. Now, with 0 reserve requirement, the bank can lend out the whole dollar. Fractional reserve banking has produced a tremendous amount of weal…

All of this looks good, except one statement that I'm willing to bet is false:

>Once the economy recovers, the reserve requirements will be reimposed.

I bet they aren't, until something awful happens, again.

Re: The Board reduced reserve requirement ratios to zero percent effective March 26

#74

Post by JumpCrisscross »

keithwhor wrote: post #6
JumpCrisscross wrote: post #4

For net transaction accounts, i.e. “demand deposits, automatic transfer service (ATS) accounts, NOW accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible bankers acceptances, and obligations issued by affiliates maturing in seven days or less”. This isn’t a wholesale elimination of reserve requirements.

So — checking accounts for businesses and consumers...? This does not sound great. Can somebody clarify as to how this is a sensible move at all / what the intention is?

> Can somebody clarify as to how this is a sensible move at all / what the intention is?

It's sensible because it's low risk. The intention is to alleviate pressure on the short-term lending markets, e.g. the repo and Fed Funds markets. This is about preventing a credit crisis moreso than juicing the taps.

Re: The Board reduced reserve requirement ratios to zero percent effective March 26

#75

Post by [deleted] »

btown wrote: post #7

With the caveat that I’m by no means an economist... The table at the bottom puts this in context: reserve requirements, which have never been reduced by more than $2 billion across the economy in any year prior, are suddenly reduced by $200 billion - the entire regulatory program seems to have been unwound. Presumably this will give late banks desperately needed liquidity and ability to lend, but it also increases s…

[deleted]

Re: The Board reduced reserve requirement ratios to zero percent effective March 26

#77

Post by AgloeDreams »

ncallaway wrote: post #69
mumblemumble wrote: post #61

Earlier quoted context omitted.

Dropping reserve rates to zero massively increases FDIC's and NCUA's risk exposure, and simultaneously increases the size of craters that individual banks can make. FDIC and NCUA are not bottomless pits of money, and I expect that, with a key safeguard removed, banks and credit unions now have the power to discover their bottoms more quickly than anyone should care to contemplate. I should disclaim: I am not a banker…

> FDIC and NCUA are not bottomless pits of money "FDIC insurance is backed by the full faith and credit of the United States government." [1] Given that FDIC insurance is backed by the United States government, if the FDIC system is unable to cover its losses, wouldn't that represent the United States defaulting on its obligations? I'm not saying that's impossible, but it seems like FDIC could represent a...pretty la…

I mean the FEd is currently considering what will amount to a near $1T aid Package as well, so I don't know how much the fed has on hand bit it really can't be much much more than 2T or so. So maybe.

Re: The Board reduced reserve requirement ratios to zero percent effective March 26

#78

Post by nerdponx »

ChrisLomont wrote: post #49
ghouse wrote: post #19

Unintended Consequences. Wow -- this sets up all sorts of moral hazard for later. And unwinding this will be extraordinarily difficult.

No it won't. Reserve ratios are commonly modified, sometimes by a decent amount. Banks have been able to move money among accounts to effectively reduce reserve requirements nearly at will. And banks have always been able to lend past the reserve requirement, as long as they soon (after the fact) borrow to cover it, usually short term via the Fed overnight lending rate. The average person has zero idea that this happ…

This is a major major change though. How do we know this isn't some kind of Klein-esque "Shock Doctrine" type of change to start undoing banking regulation as a whole?

Re: The Board reduced reserve requirement ratios to zero percent effective March 26

#79

Post by JumpCrisscross »

taurath wrote: post #58
JumpCrisscross wrote: post #43

Earlier quoted context omitted.

> Doesn't this eliminate the protections from 2008? No, it doesn't. Broader capital requirements are still in place. This move just removes reserve requirements for certain categories of transaction accounts.

Thanks for this. Of course it stands to reason that this is a defacto reduction in capital requirements no, if reserve requirements are lowered?

> this is a defacto reduction in capital requirements no, if reserve requirements are lowered?

Nope, though that's a reasonable assumption.

Reserve requirements regulate the fraction of deposits banks must hold at the central bank. Reserve requirements focus on liquidity.

Capital requirements regulate the fraction of assets banks must hold as equity (or other tiers of risk-absorbing capital). Capital reserves aren't held in a vault, and are more of an accounting fiction than reserves. Capital requirements focus on solvency.

Put another way, if half a bank's mortgages turn out to be shit, its total reserves won't change. It's total capital will.

So reducing reserve requirements could reduce banks' capital, if the freed reserves are dumped into risk assets. Or it could leave them virtually unchanged, if the freed reserves are dumped into safer assets. Systemically, if the freed reserves support a continuation of orderly payment systems, they could increase banks' capital by defending the value of their assets. (Bank balance sheets have a confusing circularity about them.)

Re: The Board reduced reserve requirement ratios to zero percent effective March 26

#80

Post by mech1234 »

Loughla wrote: post #71
mech1234 wrote: post #17

Earlier quoted context omitted.

Typically, For every dollar a bank "keeps" in your bank account, they are allowed to loan out some fraction of the dollar. Let's say that this is usually 90 cents. The amount of cash your bank actually has on-hand is 10 cents. This process is known as fractional reserve banking. Now, with 0 reserve requirement, the bank can lend out the whole dollar. Fractional reserve banking has produced a tremendous amount of weal…

All of this looks good, except one statement that I'm willing to bet is false: >Once the economy recovers, the reserve requirements will be reimposed. I bet they aren't, until something awful happens, again.

Reserve requirements are typically made more stringent while the economy is doing well. The history of these changes by the Fed is available at the link below.

https://www.federalreserve.gov/monetarypolicy/reservereq.htm...

Post reply on HN