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

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

by kaffeemitsahne • 6 years ago

137 89 6 years ago

federalreserve.gov

devbofh• 6 years ago

ELI5?

carapace• 6 years ago

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 banks are required to hold in liquid assets is determined by the country's central bank, and is called the reserve requirement or reserve ratio. Banks usually hold more than this minimum amount, keeping excess reserves.

https://en.wikipedia.org/wiki/Fractional-reserve_banking

It's a mighty pillar of our global economic systems or the biggest scam ever or both depending on who you ask.

Anyway, if I understand correctly (and I don't, IANAEconomist), now the fraction is zero. But I don't know what that means and I suspect few do. It sounds like it means that banks can just write loans all day long and "poof" money into existence, but I've been told that that is somehow not the case. Higher economics is indistinguishable from numerology (in terms of semantic analysis) to me, so I shouldn't comment further. Hopefully someone more knowledgeable will show up and read the tea leaves for us.

XnoiVeX• 6 years ago

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

zyang• 6 years ago

Banks are given license to print money.

jfengel• 6 years ago

Banks have always had a license to print money. They're just being allowed to print even more of it.

ahelwer2• 6 years ago

Say you have a bank account with $100 in it. At 100% reserve requirements, the bank must have that $100 actually in its possession at all times. This is very safe, because you are guaranteed to be able to withdraw your money in the event of a bank run. However, an economist might believe this is suboptimal because the $100 is just sitting there doing nothing rather than "circulating in the economy". Thus the concept of the reserve ratio is born: banks don't keep that $100 around, but instead lend a percentage of it out or do whatever weird trades they want to do to make money. This is called fractional-reserve banking.

Before this change, reserve requirements in the US were at 10% which means the bank could lend out $90. Now in general this is problematic because if everyone were to try to withdraw their money at once, the bank could not produce it. Thus we have the FDIC, which is a government program that insures bank account deposits up to $250k so people don't lose all their money if a bank run happens. A cynical way of looking at this is that taxpayers are on the hook for the bank's bad behavior if they go bust, and the lower the reserve ratio the more likely the bank is to overdo it.

Things also get really weird when other banks are in the picture. If you deposit $100 at bank A which has 10% reserve ratio, it will lend out $90 - so total money in the system is now $190. That $90 might end up deposited at bank B, which also has a 10% reserve ratio, so it lends out $81 making the total amount of money in the system $190 + $81 = $271. This process continues until it approaches the value of principal * (1 / reserve ratio), so in our case $100 * (1 / 0.1) = $1000 [0]. At 0% this means technically infinite money can be lent/created, although banks will presumably keep some percentage as reserves due to internal risk requirements (interesting assumption, I know).

Reserve requirement ratios are viewed as one of the levers the government can use to help steer the economy. Reducing the reserve requirement ratio has the effect of increasing the overall money supply, which has some nonlinear effect on the economy that the government wants to happen. This move to 0%, in addition to various other recent moves by the federal reserve, are all geared toward flooding the economy with cheap easy money to prop it up. They will all fail.

[0] https://www.economicshelp.org/blog/67/money/money-multiplier...

nybble413• 6 years ago

However, an economist might believe this is suboptimal because the $100 is just sitting there doing nothing rather than "circulating in the economy".

A short-sighted economist, maybe. What needs to circulate is goods and services, not money. If you have $100 in the bank (or stuffed in your mattress), that means you produced stuff worth $100 more in total than what you consumed. Those extra goods are already being put to productive use. If your savings stay safely locked away and out of circulation that just means prices will be a bit lower due to the decrease in the money supply, which benefits everyone else. And when you take that saved money and spend it later your prices will be a bit lower, too, which is your reward (interest) for basically letting everyone else borrow the value of your money for the time you had it out of circulation.

If you can take your savings and invest them in some venture likely to provide a real return—after factoring in inflation and overhead—that would obviously be better than just stuffing the money in your mattress. However, taking money out of circulation is still better for the economy as a whole than "investing" it in something that can be expected to lose value, because that would divert goods and services away from better investments. If the money supply were held constant than you could treat price inflation or deflation as indications that we need more or less targeted investment, respectively. Unfortunately that isn't the case, so we're missing a key economic signal.

jellicle2• 6 years ago

It's now legal for a bank with $1,000,000,000 in deposits to have absolutely zero cash available to pay out those deposits if people want their cash out.

What could go wrong.

bo1024• 6 years ago

I don’t know much about finance and I find this a bit terrifying. Are they hoping banks will buy lots of stocks or what is the rationale?

JumpCrisscross8• 6 years ago

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.

keithwhor• 6 years ago

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?

Spooky23• 6 years ago

They are trying to keep banks liquid to avoid a panic and closure. People are already starting to pull cash.

This is a 9/11 like event, except the impacts are nationwide, not just in the NY Metro area. Companies and people are just going to stop paying bills. I'd guess you're looking at 2-4 million people out of work in the next week. The only saving grace is that this season is a low business period for retail and other sectors anyway, but they'll start dying in the summer.

JumpCrisscross8• 6 years ago

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.

jellicle2• 6 years ago

Perhaps you can explain why reducing all reserve requirements to 0% isn't a "wholesale elimination of reserve requirements".

nybble413• 6 years ago

Do you have an example of an account type that still has a non-zero reserve requirement? Because that list sounds quite a bit like the list of accounts where reserve requirements (used to) apply. IIRC there were no minimum reserves for time accounts like savings accounts or CDs.

btown• 6 years ago

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 systemic risk. Desperate times these are indeed, but this is an unprecedented measure.

mattrp• 6 years ago

If I understand it right this impacts the reserve kept for loans. It keeps banks from calling in loans for all sorts of businesses - particularly those that are owned by your neighbors and employ that vast majority of workers.

dnautics2• 6 years ago

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 reserve requirement".

quotemstr• 6 years ago

It won't reach infinity right away though. Monetary velocity is finite, and right now, I'd guess rather slow.

notahacker4• 6 years ago

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.

gowld3• 6 years ago

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?

apalmer• 6 years ago

it will be absolutely great for the economy, rocket fuel, for about 5 years. Eventually will lead to some insane fundamental that will require a bail out.

taurath3• 6 years ago

5 years hmm, how politically convenient

seanhunter• 6 years ago

There's a point where: 1)traditional policy tools are ineffective because as rates get to zero, cutting them doesn't really provide any kind of incentive any more 2)interventions get more and more extreme and reach the point where they actually can increase panic rather than reduce it

It's pretty clear we're well past #1 and could be at #2.

The problem that policy-makers are facing here is the real economic impact of this crisis as unknowable but is very likely to be very large. So it's hard to incentivise lending.

For example if you're a bank in this environment it's pretty tough to have the courage to go out and lend to small businesses knowing the next few months are going to be brutal for their cashflow. The fed is going to have some difficulty convincing them to lend even in the presence of a zero reserve requirement ratio given that those banks will look at very serious potential writedowns on their loans in any downside scenario.

JumpCrisscross8• 6 years ago

we're well past #1 and could be at #2

No we aren't. The discount window, central banks' original and most-powerful tool, was only just accessed by big banks [1].

[1] https://www.bloomberg.com/news/articles/2020-03-17/u-s-banki...

brenden22• 6 years ago

Yikes, this is kind of scary. This could magnify the losses dramatically as lenders start to implode due to the cascade of defaults. If anything, they should increase the reserve requirements to prevent instability and encourage a flight from risky assets. Yes, this will make the stocks go down now, but it would probably result in fewer people getting laid off and going broke in the future.

I'd rather see highly leveraged companies go under quickly, rather than postponing it. A small bang now is less bad than a massive explosion later.

ouid• 6 years ago

It is bold of you to assume that there are any non-highly leveraged companies, or that their going under would not already cause a cascade of defaults.

Red_Leaves_Flyy2• 6 years ago

In other words we, as a country, would be rise to rip the bandaid off. Instead, we're slowly tugging at the edges. This is going to be a long, and drawn out recovery. I hope everyone followed the general consensus and has their retirement properly adjusted to their risk tolerance. This recovery is probably going to take years, from the time we get the economy restarted.

WillPostForFood• 6 years ago

We are following Japan’s path to stagnation.

jeffdavis• 6 years ago

I think the general consensus is that it's fine for bad companies to go under. But we have a situation here where a lot of reasonably good companies could go under just because of the social distance on a global scale.

The 2008 crunch was almost purely financial. Let's get past this pandemic and then see where the businesses shake out financially.

brenden22• 6 years ago

The CEOs will probably just take the money and use it for more stock buybacks and pay themselves bonuses. It's 2008 all over again.

They put themselves in this position by being fiscally irresponsible in order to pump and dump their stock. They should be held responsible by experiencing the joys of bankruptcy.

ilaksh2• 6 years ago

Could it lead to insolvency of banks and a potential bank run?

cabaalis• 6 years ago

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.

mech12343• 6 years ago

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 wealth for the world over recent centuries. It encourages assets to be used in a productive manner rather than hoarded, which is essentially wasteful.

Typically, the loans get paid off to the bank over time, and the bank originates new loans to continue to make a profit. Currently, there are two systemic risks:

1. If borrowers begin to default, the bank still must cover its expenses. Under stressful circumstances, they would normally not be allowed to draw down their reserve to meet their expenses. This change allows this. Once the economy recovers, the reserve requirements will be reimposed.

2. It encourages banks to continue issuing new credit to borrowers. This keeps economic activity flowing and prevents a situation where borrowers have nowhere to turn to find money to keep their business afloat until profitable times return.

Loughla2• 6 years ago

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.

ghouse• 6 years ago

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

ChrisLomont2• 6 years ago

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 happens, but it's not going to somehow be impossible (or even hard) to undo it.

nerdponx• 6 years ago

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?

mumblemumble3• 6 years ago

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.

blunte• 6 years ago

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.

y-c-o-m-b• 6 years ago

This is what I'm pondering at the moment. First would be the issue that this announcement is going to cause panic withdrawals (if it hasn't already) which I would guess has its own negative side-effects. Then it makes me wonder if printed paper would be worthless in a worst-case scenario anyway.

Or is this going to turn into Greece where all banks will close or limit the amount that can be withdrawn.

What a shit-show this has become

EDIT: another thing to consider is where to store all this cash if you withdraw. For those that have 6 figs in cash sitting in their banks, exposing that large sum of money in physical form poses an enormous risk (e.g. natural disasters or accidents being a big one)

mumblemumble3• 6 years ago

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 suppose we'll now get to have an empirical test to settle that age old debate over whether the number of people allowed to print money should be one or many. Pity Bitcoin's in such a shambles, so we can't with clean conscience make it a test among zero, one and many.

ncallaway3• 6 years ago

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?

mumblemumble3• 6 years ago

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.

Diederich• 6 years ago

My wife found out about this move when she noted that quite a few people on her Facebook feed were talking about pulling their money out of the bank.

Strange times.

taurath3• 6 years ago

Doesn't this eliminate the protections from 2008? Will this cause a run on the banks?

lawn• 6 years ago

Don't worry, the banks will just get bailed out if that happens, as seen in 2008.

jschwartzi• 6 years ago

I would think it depends on how much you trust your bank to maintain solvency through the downturn. For what its worth I'm staying with who I was banking with in the last downturn, because they were one of several banks that remained solvent and healthy through the downturn. They did this by making conservative financial decisions, which they continue to do, so I'm not worried about them.

JumpCrisscross8• 6 years ago

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.

taurath3• 6 years ago

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

liminal• 6 years ago

I'm not an economist, but it seems like the problem is a destruction of demand, so how does increasing supply help things?

JumpCrisscross8• 6 years ago

how does increasing supply help things?

Money supply.

If you're a company who invested in a great workforce, and is getting nuked due to demand destruction, borrowing to keep paying them is a savvy long-term bet.

If you can't borrow, you'll have to let them go. That not only creates human misery. It also destroys the human capital you carefully built.

rwol2• 6 years ago

Should we be moving money from the banks into another value store? Gold? Investments?

ProAm2• 6 years ago

That needed to be done in January to be on the upside of this

rwol2• 6 years ago

I don't mean as an investment per se, just as a more reliable store of money.

safog• 6 years ago

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 one) make me think that something else is afoot that we're missing here.

Of course it could be as they say, and there are a bunch of overlevered businesses that need cheap capital or they'll go bust and cutting interest rates and injecting liquidity is the only way to save them.

solotronics• 6 years ago

"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_...

ahelwer2• 6 years ago

Everyone and their dog went to go refinance their mortgage after the first rate cut, might explain the rates going up.

yanilkr• 6 years ago

With most of currency being digital, this change of reserve ratio requirements has almost no effect in the way banking and economy works. Added a Wikipedia reference which has more references to empirical studies.

“ Many economists and bankers now realize that the amount of money in circulation is limited only by the demand for loans, not by reserve requirements.”

https://en.wikipedia.org/wiki/Money_creation#Credit_theory_o...

Qasaur3• 6 years ago

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 think about it in close enough detail, and yet it is still seemingly immune from mainstream criticism.

End central banking and you've single-handedly fixed systemic wealth inequality in the United States.

JumpCrisscross8• 6 years ago

with close to nil accountability

Bank regulation is open to be criticized. But it's far from "nil".

First to central bankers, and now to private bankers

Money was originally printed by private parties, then by banks, and most-recently by central banks.

Qasaur3• 6 years ago

Bank regulation is open to be criticized. But it's far from "nil".

Bank regulation is political and is regularly criticised, I'll give you that. However, the Federal Reserve and central banking is borderline immune to any form of criticism from the electorate partly due to a lack of understanding but also due to the widespread perception that central banking is somehow a necessity in a well-functioning economy and that its operation and development should remain firmly in the domain of "experts" like economists and others. I blame out-of-control scientism in economics for this one.

Money was originally printed by private parties, then by banks, and most-recently by central banks.

Apologies, I phrased my sentence badly. It was more of a figure of speech rather than a historical account.

notahacker4• 6 years ago

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

Qasaur3• 6 years ago

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.

gowld3• 6 years ago

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.

Loughla2• 6 years ago

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.

nradov• 6 years ago

Probably a good step but it won't have much effect. Lending today is primarily limited by lack of credit-worthy borrowers, not by reserve requirements.

Der_Einzige• 6 years ago

I didn't expect to actually need those FDIC protections to guarantee that I'd be able to withdrw money but here we are...

learn4ever• 6 years ago

Anyone know the current percentage of total U.S. deposits that are "insured" by the fdic?

ilaksh2• 6 years ago

I am worried this could be a precursor to a bank run and possible wide-scale insolvency of banks.

I assume that someone will explain why I am an idiot and have no reason to worry.

robodale• 6 years ago

SO, we've summoned the monster that almost destroyed us all in 2008.

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

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