I recently opened a checking and a savings account at my local credit union. I asked them about their fractional reserve banking policy and they looked at me rather funny. After explaining FRB to the teller she was worried that I was trying to figure out how much money they had on site, as if i was planning to rob the place. She went and spoke to a manager and all she could end up doing was pointing me to the FDIC poster on the wall.
So I have some questions about FRB as it applies to small banks. First off, is there a good simple text which I could share with the bank heads about how FRB works and its benefits? It seems like any bank that can guarantee its own solvency in these down times would be able to attract a lot of new customers. Also a more general question, how does a savings-and-loan bank make money if it is on full reserve banking? If it has to keep all of its deposits available, how can it ever lend out money?
Is there a single bank in the U.S. that voluntarily operates on Full Reserve? It seems like there must be some market for this type of service.
Thanks,
jason
Well a bank could be on full reserve, and lend out money, but the original depositer could not come and try to recieve his money
Think of it as person A lending money to person B, the bank is just the middle man.
Now of course the deposit would be lower interest then the loan, so thats how the bank still makes money
"Well a bank could be on full reserve, and lend out money, but the original depositer could not come and try to recieve his money"
Well then this isn't full reserve is it? If the original depositor doesn't have immediate (full) access to his deposit then this defeats the point of full reserve banking. If the bank has to keep all of person A's money in reserve, how can it lend it out to person B?
It is possible but not likely given the current environment. The company could run a full reserve system using one or a combination of these two mechanisms:
1. Issue stock in the company. The bank could loan 100% of any equity that they never have to pay back. The initial equity would be the initial owner/s money.
2. Run the company like a mutual insurance company. In other words, charge a mutual premium or an initial fee on top of any loans and hold that money in an account until the loan is repaid. Then the borrower could continue using services without the fee. I am part of a mutual insurance company and in most years they send me a check of the difference between my subscriber account and their stated minimum reserve. A bank could easily work the same way.
The problem here is that running a FRB and paying deposit insurance is a much more profitable means to run a bank than a 100% reserve system. If in either case above you say keep a fraction like 10% then you eventually have 10 times the amount (1/reserve fraction) of loan payments coming in.
tir38:First off, is there a good simple text which I could share with the bank heads about how FRB works and its benefits?
I'm going to tread carefully here because I don't want you to be ridiculed if you show up with a text that is not official. Now, I'm having difficulties finding out if what I'm about to suggest is infact official. Also, I haven't read it myself, so all manner of disclaimers apply here!
I watched Zeitgeist Addendum the other day. I must admit it seems a little too conspiracy-theory-like. It does, however, mention a booklet from The Federal Reserve Bank of Chicago titled Modern Money Mechanics (PDF, HTML). This might be what you are looking for.
Edward L Winston is fact-checking the Zeitgeist movies and he actually emailed the The Federal Reserve Bank of Chicago about this booklet. The answer he got back was:
From: [email protected] Dear Edward, Sorry, that publication is out of print for several years now. It dealt with the expansion of the money supply through the banking system. This process can be studied in books at your local library in the money and banking section.. Don Wagener Public Information
Best of luck with the bank heads
We need to acknowledge 2 diffferent types of accounts. 1. Savings. 2 checking.
The the FRB system that everyone here complains about is on the checking account side. it is to be expected that when you put your money into savings that you can't just take it out willy nilly, of course in more recent times this has become the case, but the idea is that a savings account is a CD that you save, or lend to the bank for so much intrest, they invest in "widgets R us" and and after the specified amount of time, you can get your money back, plus the interest it has earned.
The checking account on the other hand, is the one that the FRB system creates inflation, in this case there ought to be a fee charged by the bank in order to keep the money, just like at a grain silo or at a self storage center. you pay to leave your money in the "warehouse" and you can have access to it at any time. because its a checking account.
Think if it were a chair at a storage place, you place your chair in storage and want to be able to pick it up whenever you need it, but the storage company bets you wont be back for it any time soon, so they rent it out to "B." That is criminal and that is what the banks are doing.
I'd recommend reading The case against the Fed... and maybe what has the gov't done to our money. both by Murray Rothbard. I would put up a link to the audio, but it seems that part of the site is down.
Everything you needed to know to be a libertarian you learned in Kindergarten. Keep your hands to yourself, and don't play with other people's toys without their consent.
Attackdonkey,
Yes, in my savings account, I had to open it with $50 that was not refundable until the account was 6 months old. About my savingschecking account, I agree that a free checking account with only an FDIC guarantee is good for some people and obviously the bank. I however, would be willing to pay a monthly fee for the service of having the bank store my money for me (and not lend it out to anyone).
Surely there must be some bank somewhere that operates under this model. If the fee was high enough, the bank could still make money by simply acting as a vault.
tir38: Attackdonkey, Yes, in my savings account, I had to open it with $50 that was not refundable until the account was 6 months old. About my savingschecking account, I agree that a free checking account with only an FDIC guarantee is good for some people and obviously the bank. I however, would be willing to pay a monthly fee for the service of having the bank store my money for me (and not lend it out to anyone). Surely there must be some bank somewhere that operates under this model. If the fee was high enough, the bank could still make money by simply acting as a vault.
if they dont lend it out, they make no profit (beside your monthly fee)
That means your deposit will gain no interest, so why not just buy a safe for your house or bury the money?
Schaden13,
Right, but if the fee was high enough then it would be profitable for them to do business.
On my checking account, it never gains interest. I don't want it to. I want to be able to do things that I normally do with a checking account: write checks, debit card, e-purchaces, etc. Basically, All I want is to pay extra money each month to guarantee that my checking account is on full reserve.
ah, i see your point
idk if a bank does that though
with FRB, money for loans doesn't come out of deposits. when the bank makes a loan, the legal document you sign stating you will pay X amount by Y date becomes the basis for the loan. The bank then types the amount into your account, the money doesn't come from anywhere. Now obviously a piece of paper saying you will pay $10,000 over the next 5 years isn't worth 10k right now. It is worth less than that based on the risk of default, the interest rate of the money supply (how much less is 10k worth in 5 years?), and the overall supply and demand of the loan market. So say that the piece of paper can sell for 8k right now. the 2k difference is a risk assumed by the bank. So each loan has a certain monetary risk associated with it. What does the bank use as collateral to back up this risk and stay solvent? depositor money. This wouldn't even be that bad if they kept all depositor money on hand, but they keep just enough on hand for short term operating capital and invest the rest. By leveraging this investment they can make loans based on a pool of money 10-20 times larger than what the bank actually has. The bank can still claim solvency because they can point to the aggregate value of all their investements and deposits and loans and say "if we sold some of this off we could easily pay our depositors back". This works fine as long as your predictions of the actual selling price of your assets is 100% correct. So our financial system works fine as long as you can predict the future. 0_o So what did we see in the current financial crisis? We saw writedowns, because no one was actually willing to buy at the prices that the banks had assigned to their assets. Going back to our example, the loan worth 8k now is suddenly only selling for 6k. an additional $2k has just dissapeared off the banks balance sheets. With all the banks trying to sell at once, the demand for long term loans bottomed out making every bank go insolvent at the same time.
Basically, FRB creates artificial demand for long term loans, because it treats them as if they had the majority of their value now. This is based on their theoretical value at sale time. But their real value fluctuates.
As for full reserve banking...A full reserve bank wouldn't be able to treat depositor money as if it were an asset to be borrowed against. Loans would have to be borrowed against the operating capital of the bank and its investors itself. Of course this reduces the supply of overall loans being made and thus drives up the price. The benefit of FRB is that it frees up more capital to be used as loans, which stimulates the economy. And it works fine...as long as you can predict the future. A full reserve bank could do well. But it would constantly be tempted to do something with all the depositor money sitting there. After all, if you had 10 million sitting in a vault that hadly fluctuated in overall size, wouldn't you be tempted to invest half of it at 5% and make 500k a year? You'd tell yoursel fit was alright since you could always cash out your invetments if a bunch of depositors came calling one day.
EDIT: Having just reread my reply I realize it is too antagonistic. I truly am sorry about that nazgulnarsil! Hope you can read through the gall nevertheless.
nazgulnarsil:The bank can still claim solvency because they can point to the aggregate value of all their investements and deposits and loans and say "if we sold some of this off we could easily pay our depositors back".
By that logic everyone can claim solvency. It is not a matter of claiming, but proving, and no frb-bank can prove solvency today. Every other kind of business than banks must always manage their money stream. You do this by aligning the time structure of yours assets and obligations. Thus if you know you must pay down $100.000.000 within two years (short-term loan) you damn better have aligned your assets to be able to pay the full amount within two years. Now, the time structure of bank assets and obligations todey makes this impossible, because customers can demand their deposits instantly. Thus the bank assets can potentially be redeemed within 0+ days. Thus bank obligations ought to reflect this!
nazgulnarsil:As for full reserve banking...A full reserve bank wouldn't be able to treat depositor money as if it were an asset to be borrowed against. Loans would have to be borrowed against the operating capital of the bank and its investors itself.
Of course full reserve banks can treat depositor money as assets. They just need to align their time structure of assets via time-deposits, e.g. 1%@1 year, 2%@2 year etc.
nazgulnarsil:The benefit of FRB is that it frees up more capital to be used as loans, which stimulates the economy. And it works fine...as long as you can predict the future.
FRB doesn't just "free up more capital". In bust periods it seems it does quite the opposite. In regards to "stimulating the economy" your are missing the caveat "in the short run". In the long run we are all dead, remember? Hence your caveat about "predicting the future" strikes me as being quite hollow.
nazgulnarsil:A full reserve bank could do well. But it would constantly be tempted to do something with all the depositor money sitting there. After all, if you had 10 million sitting in a vault that hadly fluctuated in overall size, wouldn't you be tempted to invest half of it at 5% and make 500k a year? You'd tell yoursel fit was alright since you could always cash out your invetments if a bunch of depositors came calling one day.
You really need to read up on how free banking works. This is utter nonsense, I'm sorry to say.
I agree that there are a lot of holes in nazgulnarsil's theory but could you expound on one point:
corpus delicti:Of course full reserve banks can treat depositor money as assets. They just need to align their time structure of assets via time-deposits, e.g. 1%@1 year, 2%@2 year etc.
I'm unclear how this works
During that 6 months you'll probably pay them $5 per quarter in "maintenance fees". For the luxury of earning .17% interest.
I closed my brick & mortar savings account after I saw the first quarterly fee exceed interest paid.
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David Z
"The issue is always the same, the government or the market. There is no third solution."
corpus delicti:By that logic everyone can claim solvency. It is not a matter of claiming, but proving, and no frb-bank can prove solvency
I agree.
again, no problem with this, savings would be in the form of CD's.
corpus delicti:FRB doesn't just "free up more capital". In bust periods it seems it does quite the opposite.
I agree. I'm talking about from the perspective of FRB supporters. I support free banking.
corpus delicti:You really need to read up on how free banking works. This is utter nonsense, I'm sorry to say.
there's The Mystery of Banking, History of banking and currency in the U.S., and one other I can't remember. Which would you suggest?