> How could a bank lend _any_ money if it must reserve 100% of deposits as cash?
That’s the thing though, they could lend out and pay interest on “savings” with the understanding that the money might not be immediately available for withdrawal as it’s “in the wild”.
And a different class of banking, we’ll call it “checking”, would allow for immediate withdrawal as it’s backed by 100% reserves and doesn’t pay interest because it doesn’t make any money for the bank. Heck, they might even charge for the convenience of warehousing your money and being able to transfer it to any other economic actor you chose through a novel intra-bank clearinghouse.
What this doesn’t allow is for banks to lend out 90% of every dollar they take in — even ones available for immediate withdrawal.
As we’ve seen from the recent SVB[0] catastrophe if people assume their money is immediately available and it isn’t there’s big problems because everyone rushes to get their money right now instead of maybe getting their money at a later date. Big problem…
This is all stuff they figured out centuries ago, the main problem is it cuts into the banks’ profits so it isn’t done this way.
[0] as an illustration of the problem, they didn’t seem to get in trouble due to fractional reserve lending but from the liquidity of their assets.
> That’s the thing though, they could lend out and pay interest on “savings” with the understanding that the money might not be immediately available for withdrawal as it’s “in the wild”.
Those are Certificates of Deposit.
> they didn’t seem to get in trouble due to fractional reserve lending but from the liquidity of their assets.
It was the opposite. SVB had over-invested in long-term US treasuries, which are extremely liquid, but were falling in price due to the rapid increase of interest rates. If not for withdrawals squeezing their reserve, SVB could hold onto those treasuries until maturity and get back 100% of their principle.
---
I think the disconnect is that savings accounts are not popularly well understood. People are shocked when they understand that the money they deposited is not sitting in a big vault.
You could tweak fractional reserves to be 20% (or 80%) of deposits, but that comes at a cost too. For example, it would create scarcity of money available for lending, which in turn would make loans more expensive (e.g., higher interest rate mortgages could double the cost of home ownership.)
The current system prevents the worst of bank runs by covering a good chunk of assets with insurance (FDIC in the US). It's a system that allows banks to fail and protect customer deposits.
The collapse of SVB was not a "catastrophe" because the banking system is intended to let banks fail. The alternative is far worse.
That’s the thing though, they could lend out and pay interest on “savings” with the understanding that the money might not be immediately available for withdrawal as it’s “in the wild”.
And a different class of banking, we’ll call it “checking”, would allow for immediate withdrawal as it’s backed by 100% reserves and doesn’t pay interest because it doesn’t make any money for the bank. Heck, they might even charge for the convenience of warehousing your money and being able to transfer it to any other economic actor you chose through a novel intra-bank clearinghouse.
What this doesn’t allow is for banks to lend out 90% of every dollar they take in — even ones available for immediate withdrawal.
As we’ve seen from the recent SVB[0] catastrophe if people assume their money is immediately available and it isn’t there’s big problems because everyone rushes to get their money right now instead of maybe getting their money at a later date. Big problem…
This is all stuff they figured out centuries ago, the main problem is it cuts into the banks’ profits so it isn’t done this way.
[0] as an illustration of the problem, they didn’t seem to get in trouble due to fractional reserve lending but from the liquidity of their assets.