Talk:Fractional-reserve banking

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Bronze? Тиранесoptimize pastry chef, bless nitrogen? 20:46, 3 February 2011 (UTC)

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[edit] Really good article on the matter

SlayersX of Thrive Debunked, a blog that takes down one of the more recent libertarian propaganda/conspiracy theory movies around the web, just posted a really good article about fractional-reserve banking. I think this is a good source to use for our article. What do others think? Mr. Anon (talk) 01:35, 24 April 2012 (UTC)

[edit] However, letting these banks fail would have wiped out the cash and savings of every depositor

Is this true? I thought that's what the FDIC is for. Perhaps I'm missing something Cow...Hammertime! 16:32, 14 August 2012 (UTC)

The FDIC is financed by the banking industry so any payments come out of the Deposit Insurance Fund which currently covers only about 1.15% of all deposits. If they had to pay out a significant proportion of that then there could well be a crisis of confidence and a run on the banks which might have caused further banks to fail through a liquidity crisis, although they can borrow up to $500bn from the US Treasury. The FDIC can handle the odd financial institution failing but not a group of really large ones. However, wiping out [all] the cash and savings of every investor is a slight overstatement as obviously some people would get some compensation. Redchuck.gif ГенгисOur ignorance is God; what we know is science.Moderator 20:02, 14 August 2012 (UTC)
Very interesting & very good, but can you cite a source on the 1.15% figure? Is this the assets of FDIC? If the FDIC were to fail (as I understand it, it never was in danger of failing in 2008) this would necessitate some emergency Congressional (and Federal Reserve) action like the TARP program. nobsCorporations are people, too 20:17, 14 August 2012 (UTC)
According to WP the FDIC are mandated to have the DIF at a minimum of 1.15% after it had previously gone as low as 0.25%. Redchuck.gif ГенгисRationalWiki GOLD memberModerator 20:27, 14 August 2012 (UTC)
Like all insurance, the premiums banks pay for deposit insurance are regulated by the number of anticipated bank failures in the near future, including presumably a fairly widespread catastrophic crisis. And this phrase, "If there is an excess of the number of people demanding money in a day, and the bank cannot come up with the money, the bank becomes insolvent," is incorrect. If the amount of cash withdrawals in a 24 hour period exceed the reserve requirements, the net effect is only a temporary liquidity squeeze, solved by interbank overnight borrowing. Insolvency is when the total claims (not just a claims in a 24 hour period) against the bank exceed bank assets. nobsCorporations are people, too 20:34, 14 August 2012 (UTC)

My understanding is that the "banks" that were bailed out are financial institution completely different from the normal understanding of "place where you get a savings and checking account" understanding of banks. They did not have "depositors", they had investors.Fdof (talk) 05:38, 24 August 2012 (UTC)

There's a difference between investment banks and commercial banks, the latter being the familiar "place where you get a savings and checking account." However, after the partial repeal of Glass-Steagall, these two types of institutions were allowed to merge. Bailouts went to investment banks and insurance groups (e.g., AIG) as well as your merged commercial/investment banks (Citigroup). So letting some institutions, i.e. insurance and investment banks only, fail would have had no direct effect on depositors. Letting anything with conjoined commercial bank fail would have, though. Nebuchadnezzar (talk) 05:59, 24 August 2012 (UTC)
Yes, that's a good understanding of it. The repeal of Glass-Steagall allowed wp:proprietary trading on behalf of a banks own interests. Previously, banks were regulated to use bank capital (that is to say, the bank's own money, not depositors money) only on extremely conservative investments, such as T-bills, or to produce earnings through brokerage on other people's money, not direct investment of their own funds. The Volker Rule is an attempt to regulate proprietary trading, which appears here to stay, cause there is now no un-repealing the repeal of Glass-Steagall. nobsCorporations are people, too 20:32, 24 August 2012 (UTC)

[edit] LIBOR & Fed Funds

In Great Britain interbank borrowing is done at the LIBOR rate. In the United States, commercial interbank borrowing to meet reserve requirements is done at the Federal Funds rate. Please read the citation provided, the Federal Reserve Bank of New York, which states, "Federal funds, or fed funds, are unsecured loans of reserve balances at Federal Reserve Banks that depository institutions make to one another. The rate at which these transactions occur is called the fed funds rate" before reverting. While LIBOR is used in the United States for various other purposes, LIBOR is not the United States commercial banks use for overnite interbank lending to meet reserve requirements. It is the Fed Funds rate, published daily in any newspaper. nobsCorporations are people, too 20:08, 21 August 2012 (UTC)

supporting cites

  • Wikipedia: In the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances" (i.e. reserve requirements).
  • wp:Federal_funds_rate#Comparison_with_LIBOR: Though the London Interbank Offered Rate (LIBOR) and the federal funds rate are concerned with the same action, i.e. interbank loans, they are distinct from one another...

[edit] The Good and Bad

  • In the world of electronic banking, banks can now create "money" out of thin air, through create accounts.

No sure this belongs on the Bad side. Wikipedia says in its wp:Interbank lending market,

  • Low transaction volume in this market was a major contributing factor to the financial crisis of 2007.

Comments (1) banks creating "money" through interbank lending accounts is not new; (2) these new electronic (presumably consumer) accounts appear to be a step to mitigate another "credit freeze". nobsYe shall all perish in flames - Kim Jong-un 09:04, 3 April 2013 (UTC)

[edit] This article contradicts itself

First, it's said that banks "loan out the remainder to generate revenue for the bank and depositors by charging interest on loans of that money."

Then, "loans can be made by the combined accounts of many depositors, instead of having a few very wealthy people make personal loans. Most Americans would not have home loans or employers meet payrolls without fractional reserve banking. It has incentive, by paying interest, to keep money in banks so they may generate loans."

The quote from Lord Adair Turner seems contradictory to all of this: "Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account."

At the moment, the article is suggesting that deposits create loans in one place, then suggesting that loans create deposits in another. Some clarification of which perspective is actually correct would be helpful.— Unsigned, by: Infinitebloom / talk / contribs

As a very basic example...If you take out a loan to buy a friends car it comes from deposits in bank 1 (your bank) and becomes a deposit in bank 2 (their bank). As long as the reserve requirement is met, say 10%, bank 2 can loan out the remaining 90% as long as the deposit remains. The bank makes money on the interest it charges.
That quote is also an incomplete quote of a point by Knut Wicksell (1898), and you can read the full paper and quote here, in Adair Turner's paper. This was before the need for reserve requirements and was one of Knut's criticisms of the banking practices during his time. -EmeraldCityWanderer (talk)

[edit] How would ending fractional reserve banking destroy capitalism?

The first footnote on the page states that ending fractional reserve banking would destroy capitalism. I clicked on the link but the page has been destroyed. Could someone explain to me why this would be the case? Also, I think it would be beneficial for this to be explained in the wiki. Random guy (talk) 13:56, 25 April 2015 (UTC)

Because the entire point of banking with reserves is to stabilize the money market in both directions. Require some reserves to prevent sudden collapses, and smooth out the money supply by lending more in high demand, less in low demand. Gold can't do this. At all. Oh, and all those adverts talking about investing in gold? Notice that they are willing to accept your "worthless fiat" for all that delicious gold.
Think of money as just another commodity like corn, oil, or shovels. I'm not using my shovel 24/7, so I put it in my shed. But while in the shed, it does nothing. So I lend my shovel to the shovel bank, and they pay me a small amount of money. They lend out the shovel to someone else for more money. The result is that there are "more" shovels in existence, because I "have" a shovel and the person who the bank lent to also has a shovel. But what if I want my shovel back if someone else has it? They have a reserve so they always have a few shovels just in case. To prevent the scenario where EVERYONE wants their shovel back being an issue, the shovel banks of the country have their own reserve, like the fed.CorruptUser (talk) 13:18, 25 April 2015 (UTC)
So full-reserve banking would result in less economic activity in the economy as less capital is available to be loaned out for investment and to increase production in the economy. So the Austrians believe that full reserve banking will allow capitalism to prosper as usual but without the risk of bank runs and "fraud" of lending over reserve requirements. But in reality, the two go hand in hand and without such risk, economic activity will ground almost to a halt. But then they would argue that we find other ways financing these things. Couldn't the role of making loans, financial intermediation and maturity transformation be taken over by other institutions other than banks? Also, wouldn't the prices of things that traditionally we use loans for, such as commercial property, come down as a result of the free-market mechanism? Random guy (talk) 14:11, 25 April 2015 (UTC)
Well, yes, there were a number of different things tried before banks existed and franctional reserve banking was tweaked into current interations. I'm not sure how indepth to get with the explanation because it's the economic history of the world from the beginning of money to about the 1500's for organized mercantile banking and 1900's for really regulated fractional reserve banking. It might be good to catch up on that information before continuing. -EmeraldCityWanderer (talk) 14:36, 25 April 2015 (UTC)
"Full reserve" means "we can't lend anything at all". I mean, think about it. That defeats one of the purposes of banks. If you think "oh, they have $500k, we deposit $500k and they lend out their $500k", no, that's not what will happen. They will just become money lenders and lend out their $500k and not bother accepting deposits. But the lending will still happen, just without reserves. And that money will be traded to someone else who could also lend it, and the money multiplier will STILL happen. In other words, "Full Reserve" banking is the same as "NO Reserve" banking. And unlike the current system, you won't have a safe place to store your money, lending will be made by unprofessionals, less sound ideas will receive more approval (this might explain the crank magnetism here; "WAAAAH A BANK WON'T LEND ME MONEY TO START MY NEW CELTIC MEDICAL CLINIC!!!"), oh and people tend to be FAR more bigoted than sociopathic banks, and to top it all off it will have even fewer regulation and safety controls in place! CorruptUser (talk) 14:47, 25 April 2015 (UTC)
Go as in-depth as you want with the explanations! I study economics at university and I've found that the textbook explanations of how banking works are fairly unsatisfactory. Have any of you read the Bank of England bulletin "Money creation in the modern economy" 2014 Q1? It talks about how reserves aren't a binding constraint on lending and that the central bank doesn't mandate the amount of reserves that are available. This seems at odds with the description on the ratwiki page as it emphasises the role of the reserve requirements and the money multiplier effect as limits to lending, when in reality many countries such as Canada don't have a reserve requirement. I've read a lot of different accounts on what fractional reserve banking actually is so it's very confusing what's actually the correct description. Especially when your university textbook is inadequate. Random guy (talk) 15:20, 25 April 2015 (UTC)
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