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

federalreserve.gov

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

#61

Post by mumblemumble »

ncallaway wrote: post #54
mumblemumble wrote: post #24

It would seem that the logical response to this announcement is go run the banks right now, before March 26, and before anyone on Fox and Friends thinks to mention to their viewers what this really means.

> It would seem that the logical response to this announcement is go run the banks right now, Is there a reason I shouldn't rely on the FDIC (or NCUA for credit unions) insurance? Is the expectation that if banks systematically fail, FDIC won't be able to cover all of the losses?

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, I am just a completely random person on the Internet, possibly a troll, and certainly someone who occasionally posts with a trollish twinkle in their eye. Don't take this as financial advice. Anyone who assumes I know what I'm talking about will get what they deserve for their efforts.

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

#62

Post by XnoiVeX »

carapace wrote: post #22
devbofh wrote: post #2

ELI5?

Well... > Fractional-reserve banking is the most common form of banking practised by commercial banks worldwide. It involves banks accepting deposits from customers and making loans to borrowers, while holding in reserve an amount equal to only a fraction of the bank's deposit liabilities. Bank reserves are held as cash in the bank or as balances in the bank's account at the central bank. The minimum amount that bank…

It is not clear if this is temporary. I do not see an end date just an effective date. Does anyone know?

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

#63

Post by gowld »

_gx90 wrote: post #42

One day people are going to look back to today and wonder why we have essentially given a license to print money to a privileged group of people with close to nil accountability. First to central bankers, and now to private bankers (which collect a profit from literally creating money out of thin air and lending it out). Our entire fiat monetary system really is incredibly bizarre and borderline fraudulent when you t…

How will someone start or grow a business or buy a house, without banks?

Is it your claim that the past 200 years of economic develop were stunted by the banking system?

Without fiat money, you have to disable value-generating productive resources as placeholders.

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

#64

Post by notahacker »

JumpCrisscross wrote: post #50
notahacker wrote: post #46

Earlier quoted context omitted.

The reserve requirement limit is purely theoretical anyway, since the Fed is obliged to pump more reserves into the system to maintain its interest rate targets when commercial banks [net] lend in excess of their current reserves anyway. The UK hasn't had a reserve requirement since 1981.

> UK hasn't had a reserve requirement since 1981 Capital requirements remain in place, for both British and American banks. (As remain reserve requirements for most assets at American banks.)

Agreed (I nearly mentioned it in the original post), and stricter capital requirements now than for much of the period since 1981. (Capital requirements don't entirely restrict the capability of the commercial banking sector to expand the money supply either, but they do require undercapitalised banks to raise more equity funding or similar if they want to continue to expand their loan portfolio)

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

#65

Post by solotronics »

safog wrote: post #36

The Fed has been obsessed with liquidity since this crisis has hit. From a high level, I understand why but this coupled with the repo market issues we've been having on and off for the past six months or so, the mortgage markets gumming up (avg 30Y mortgage rate went _up_ after the Fed cut rates), potential strain on dollars in the currency markets (lots of demand from foreign countries, no supply? Unsure about this…

"It helps to understand that the dollar has two layers:

The first layer is central bank money (reserves) and payments are ultimately settled in reserves. Reserves can either be cash (notes) or account balances that banks have with the Fed. This first layer money never leaves the banking system and only banks with access to the Fed can have it.

The second layer is money that banks can create themselves out of thin air. When they grant you a loan they create a claim against you on the left side of their balance sheed and they create your deposits on the right side of their balance sheet.

When you wire transfer your deposits to another bank you instruct them to transfer reserves to the other bank, since that is what payments are settled with. Therefore banks can create as many loans as they want and are only limited by their ability to generate reserves.

This is where central banks come in. In order to get reserves, banks participate in Repo auctions and can get reserves against collateral. It used to be that collateral needed to be really good, but the quality has decreased a lot lately so that the Fed even accepts CDOs or regular bank loans that they just created.

Since shadow banks (which is really just a fancy word for Asset Managers, Dealers/Brokers and SPVs or foreign banks) do not have access to the Fed, they rely on other banks that DO have access to the Fed to lend them reserves. This used to be the case in the unsecured LIBOR market overnight, and if there was any doubt that a player was not solvent, simply nobody would lend to them overnight. In order to stabilize this, the Fed was running QE in order to channel reserves into the shadow banking system by buying assets (CDOs, bonds, etc.). Nowdays, the secured Repo market has replaced the unsecured interbank market by a larger extent since the need for trust is lower.

In a crisis just like today even the interbank repo market is drying out a bit since the value of collateral in foreign markets is questioned and US banks are protecting their reserves. Therefore the Fed is jumping in to establish trust in market liquidity again by pumping reserves into the market and show their lender of last resort function (today also dealer of last resort)."

https://miltonfriedman.hoover.org/objects/58159/the-eurodoll...

https://www.reddit.com/r/wallstreetbets/comments/fezfqi/the_...

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

#66

Post by gowld »

mumblemumble wrote: post #57
blunte wrote: post #37

Earlier quoted context omitted.

This would be my take on it as well. However, a pile of government printed paper may not be worth much anyway in a worst case scenario.

True. It might dilute right quick if the banks get to start printing it, too. I suspect the Nash equilibrium may be for them to do so with reckless abandon. One would hope that the Fed wouldn't actually allow that to happen. But how does one re-impose reserve requirements without causing even more problems? It's like in that one song: "And I don't know why she swallowed the fly. Perhaps she'll die." On the upside, I…

Banks don't print money. They give out depositors' money to borrowers. If those depositors all demand their money back, then the FDIC covers it, so the borrowers owe the governemnt (taxpayers) money. If they pay back, crisis averted. If they don't, then it's a wealth transfer from taxpayers to the people who borrowed the money and spent it on consmption or waste.

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

#67

Post by jstrom »

gowld wrote: post #59
dnautics wrote: post #23

Earlier quoted context omitted.

It's completely insane that they describe this in linear terms. The effects of reducing the reserve requirement is inverse-linear with respect to the ratio. Since the money multiplier is 1/r, reducing the reserve requirement to 0 means that any dollar has an unbounded limit as to how far it can be re-lent. That is quite literally infinitely more unprecedented than a 100x bigger dislodging of the "reduction in the res…

How so? Borrowed money can only be re-lent if the person who borrowed it puts the money in a transaction account. Why would anyone bother to do that?

We typically assume that loans are taken for some immediate use (rather than just having cash on hand). Thus you get the following scenario:

Bank loans $money to person A. Person A uses the $money to buy from person B. Person B deposits $money into the Bank. Bank now has $money (less reserve requirements) available to lend.

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

#68

Post by notahacker »

_gx90 wrote: post #60
notahacker wrote: post #53

Earlier quoted context omitted.

> End central banking and you've single-handedly fixed systemic wealth inequality in the United States. End central banking and San Francisco will still be full of homeless people and rich people

I doubt that the VC boom would have ever reached the heights it has without easy money policies and quantitative easing from global central banks. You would likely still have homeless people, but you would certainly have far less rich people.

Sure, we would certainly have less wealth in the absence of easy money. But we had paupers, merchants and nobility for several millennia's worth of limited quantities of precious metals being the only money, so it stretches credulity to pretend that hard money has any kind of egalitarian upside other than levelling down.

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

#69

Post by ncallaway »

mumblemumble wrote: post #61
ncallaway wrote: post #54

Earlier quoted context omitted.

> It would seem that the logical response to this announcement is go run the banks right now, Is there a reason I shouldn't rely on the FDIC (or NCUA for credit unions) insurance? Is the expectation that if banks systematically fail, FDIC won't be able to cover all of the losses?

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 large bit of money.

[1] From: https://www.fdic.gov/deposit/deposits/faq.html

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

#70

Post by Loughla »

_gx90 wrote: post #42

One day people are going to look back to today and wonder why we have essentially given a license to print money to a privileged group of people with close to nil accountability. First to central bankers, and now to private bankers (which collect a profit from literally creating money out of thin air and lending it out). Our entire fiat monetary system really is incredibly bizarre and borderline fraudulent when you t…

>Our entire fiat monetary system really is incredibly bizarre and borderline fraudulent when you think about it in close enough detail

I mean, almost every social construct is bizarre and borderline fraudulent when you get into it in granular detail. Why does someone paid by taxes working in a government created 200+ years ago get involved in my choice on who I marry or live with? Why does an arbitrary marker on a map indicating someone 'owns' a piece of the earth mean I can't walk across the actual physical ground?

They're social constructs. They're not natural. They're supposed to be bizarre. That's the point.

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