patrick.net

indigenous says

But because a bank is in a special situation, of lending money, it is unique. E.G. the reserve rate, of course it would solve a lot of problems if the rate was 100%.

Just curious---have you even considered what a 100% reserve rate actually means? My guess is that you haven't....

tatupu70 says

Just curious---have you even considered what a 100% reserve rate actually means? My guess is that you haven't....

Bad guess...

indigenous says

Bad guess...

OK great--so learn me what it would do to lending. How much could banks lend out?

For example, if a bank had $20MM in deposits, how much could it lend out?

tatupu70 says

OK great--so learn me what it would do to lending. How much could banks lend out?

As much as they want, if they have the money to lend out, but no more.

indigenous says

As much as they want, if they have the money to lend out, but no more.

lol--consider it some more.

Here's a hint. After a bank lends money, it no longer has that money. So it doesn't count toward the reserve requirement.

Tutu, your description is not correct. 100% reserve requirement refers to credit created to reserve ratio. If a bank has $20 million deposit, it can lend out $20 million under such a system. The 10% reserve requirement system would allow $200 million loans to be made based on the same $20 million deposit.

Cash money does not have to leave the bank at all unless the clients want cash. Most transactions are carried out as account entries.

Reality says

Tutu, your description is not correct. 100% reserve requirement refers to credit created to reserve ratio. If a bank has $20 million deposit, it can lend out $20 million under such a system. The 10% reserve requirement system would allow $200 million loans to be made based on the same $20 million deposit.

No, it doesn't. The $200MM loans is what is created after many, many banks loan the same $20MM. If a bank lent out the entire $20MM, it would have a 0% reserve. 10% reserve means a bank can lend out $18MM of a $20MM deposit.

Reality says

Cash money does not have to leave the bank at all unless the clients want cash. Most transactions are carried out as account entries.

That's irrelevant to the reserve requirement.

tatupu70 says

No, it doesn't. The $200MM loans is what is created after many, many banks loan the same $20MM. If a bank lent out the entire $20MM, it would have a 0% reserve. 10% reserve means a bank can lend out $18MM of a $20MM deposit.

Correct, except it doesn't have to be many banks. Could be one bank. That is $20MM deposits, lend out $18MM, borrower buys building, seller of building deposits $18MM in same bank, now bank has $38MM deposits with reserve requirement of $3.8MM, has already lent $18MM, so $16.2MM available to lend. Lends another $16.2MM, seller deposits $16.2MM, total bank deposits are $54.2MM, reserve requirement $5.42MM, already lent 34.2MM, so $14.58MM available.

And so on.

At the federal level, the maximum theorectical money supply is 10x (FRN+reverse repos). 10X (FRN+RR) minus money supply is excess reserves.

control point says

Correct, except it doesn't have to be many banks. Could be one bank. That is $20MM deposits, lend out $18MM, borrower buys building, seller of building deposits $18MM in same bank, now bank has $38MM deposits with reserve requirement of $3.8MM, has already lent $18MM, so $16.2MM available to lend. Lends another $16.2MM, seller deposits $16.2MM, total bank deposits are $54.2MM, reserve requirement $5.42MM, already lent 34.2MM, so $14.58MM available.

Is there a point here? Leverage is leverage. Why is lending and redeposting somehow different than if someone had just put in 54.2M in the first place. There would still be 5.42 in reserve and 48.8 to lend. It doesn't make any difference at all how many banks are involved. If you ran this back and forth between 2 banks the end numbers would be the same.

indigenous says

tatupu70 says

OK great--so learn me what it would do to lending. How much could banks lend out?

As much as they want, if they have the money to lend out, but no more.

That would be a 0% reserve rate and lending leverage would be infinite. Congratulatons, you've just created history's largest credit bubble.

Or are you saying banks have to check each and every deposit to make sure none of the money was borrowed from another bank. That's certainly a workable system. Not.

Control Point beat me to the punch explaining how the math works with depositing into the same bank.

Also, reserve requirement is for on-demand deposits. The requirement does not apply to timed deposits. So the idea that 100% reserve requirement would stop baking is not valid. It would not stop banking, but would stop fraud: promising on-demand that can not possibly be cashed out when even as little as more than 1 in 10 want the on-demand money cashed out. Bank panic is the direct result of such a fraudulent promise.

Reality says

Control Point beat me to the punch explaining how the math works with depositing into the same bank

lol--was there someone besides Indig (and you) who didn't understand that?

Obviously you did not understand the real multiplication factor. Nor did you understand that reserve requirement does not apply to time deposit.

Frankly, demand deposit as it is carried out in fractional reserve banking is classic commercial fraud: pyramid scheme. Under 100% reserve requiremrnt, banking can continue by paying interest on term deposit, while charging storage fee on demand deposit. Voila, run on the bank is avoided.

Reality says

Obviously you did not understand the real multiplication factor. Nor did you understand that reserve requirement does not apply to time deposit.

Nope, I understood them both, as my previous post illustrated.

Reality says

Frankly, demand deposit as it is carried out in fractional reserve banking is classic commercial fraud: pyramid scheme

When did people stop understanding what a pyramid or Ponzi scheme is? It's misused so often now that it's almost lost its meaning.