Fractional Reserve Banking : Criminal?

H

hawkeye

New Member
Silver Stacker
This is my basic view of FRB put forth in another thread

Well, yeah, the whole thing about person borrowing 90 then next person borrowing 81 etc, obviously isn't real world. When was the last time you went to the bank for a loan and were told you had to borrow exactly 90% of what the last person borrowed?

So in real world, let's say a (simplified) bank balance sheet looks like

Assets
Cash - 10,000
Loans - 50, 000

Liabilities - 60, 000

The bank is now levered 1:5. It has 20% reserve. If someone then came in and say wanted a 30,000 loan, that 30,000 would be added to both sides of the balance sheet like so

Assets
Cash - 10,000
Loans - 80, 000

Liabilities - 90, 000

30,000 loan added to the asset side. And then 30,000 would added to the person's account as a liability to the bank.

So the bank creates new credit (after all, credit is just a book-keeping entry), but it has to pay interest on the liability side whereas it is receiving interest from the loan. The difference between the 2 interest rates goes to the banks operating expenses, profits etc.

This was in the FRB world.

In the current world the reserves required consist of Tiered Assets rather than just cash which comprise things like Bonds, Gold, etc. You can look it up on wikipedia.

As far as I know, and Steve Keen did an analysis of this, banks create credit and it can go beyond the reserves as they shore up the reserves later on. Which kind of makes sense with all the transactions the bank does every day, they don't want to give up business just because they temporarily don't have the reserves.

Which is why it is not true to say that banks loan out reserves. They don't. And that's why expanding bank reserves doesn't automatically create lending and inflation, as we've seen in the past few years.

Banks lend if they have creditworthy borrowers.

The entire problem is not with FRB itself, which I believe would exist in a free market, but the abuse that occurs when the government gets involved and starts manipulating interest rates down, implicitly and explicitly backing the banks and of course ultimately bailing them out with taxpayer money. Basically when this happens banks can increase volume massively as perceived risks are lessened. That's why they have massive amounts of money now, because of increased volume, not some ridiculous interest rate spread. Of course, the risks still exist but remain percolating and building under the surface. There's no such thing as a free lunch. Someone always has to pay.
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I don't think the bank is trading insolvent. I think it is more like insurance companies. There is no way they can pay out all their policies at once, but it is risk management. The same basically is true for banks.

But I'm curious to hear opposing views.
 
When was the last time you went to the bank for a loan and were told you had to borrow exactly 90% of what the last person borrowed?
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That is the most retarded piece of logic I've ever seen.

The cash (digits on a computer) are fungible, so naturally there's never going to be some arbitrary borrowing limit based on the previous person's deposit.
 
I must confess that it has been a VERY long time since I was but a poor starving bank officer.

It is almost as long since I bothered to read an Annual Report, and its Financial Statements. I do not even get a copy with my shareholders correspondence.

I did a Google search on 'WESTPAC 2012 Annual Report' to see what i could find. I checked out the 2 things most likely to illustrate the "FRB" many are talking about on this Forum. FRB is something that never came up in normal conversation in my time in the bank.

I found that in 2012 WESTPAC had LOANS out to ALL customers, private and business, of about $515 BILLION.

WESTPAC had DEPOSITS of $394 BILLION, Plus "Debt Issues" (Notes and Debentures etc) of $147 BILLION. A total of $541 BILLION.


The banks Assets were $674 Billion and its Liabilities were $628 billion!

(Figures are not exact due to various minor 'bits and pieces' that make up the differences.)

Question!

If WESTPAC has DEPOSITS of $541B, and LOANS of $515 B could someone please explain the FRB in this case please?



OC
 
PS,


I am aware of the general world standard of 'Tier.1. Reserves' currently at about 10%, which are usually in Sovereign bonds, etc.

These are 'supposed' to be readily sellable to provide emergency funds if needed.

But these do NOT generate additional funds for lending by the bank.



OC
 
Old Codger said:
If the banks has DEPOSITS of $541B, and LOANS of $515 B could someone please explain the FRB in this case please?
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According to the Australian Banking Statistics for 2012 Westpac had assets listed as:

$ 12,436,000,000 in cash.
$ 26,570,000,000 in trading securities.
$111,519,000,000 in investment securities
$ 130,000,000 in acceptances of customers
$406,925,000,000 in gross loans and advances

http://www.apra.gov.au/adi/Publications/Documents/MBS December 2012.pdf

Point is the $541B is not deposits. It's their assets. And remember loans are included in the assets. Loans are not deposits.
 
Apples and Oranges i am afraid.

Or a red herring!

Please re-read my post.



"Loans are not deposits."

I think i already knew that.




OC
 
The simple reality is that no bank engaged in fractional reserve banking can pay its debts as and when they fall due, because a significant proportion of current liabilities (cash deposits) have been lent out and are no longer possessed by the bank.

Consequently, all banks engaged in the practice are inherently insolvent. It is the legal system that says that banks are different to all other individuals and businesses and are allowed to do this. They have been granted a priviledge that no other individual/entity has.

Is it necessary? Of course not. All they would have to do is arrange appropriate terms with depositors that match their liabilities with their incomes.
Is there a natural incentive to do it? Of course. Banks have done it for centuries before the alternative credit laws were introduced and non-banks still do it. The difference is that there are real criminal penalties on the books for non-banks. Even in the event of a bank run when the whole institution collapses the bankers get off scot free.
 
"The simple reality is that no bank engaged in fractional reserve banking can pay its debts as and when they fall due,"

^^^^^^ sounds like more BS from BS

As far as i know they have to pay their bills just like anybody else
 
renovator said:
"The simple reality is that no bank engaged in fractional reserve banking can pay its debts as and when they fall due,"

^^^^^^ sounds like more BS from BS

As far as i know they have to pay their bills just like anybody else
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But they're paying their bills with demand deposits. That's the difference.
 
Is someone going to email the RBA to get the exacts or is everyone just going to give an opinion .

For the amount of links & information that gets posted on this site .There has always been a lack of real information on how the RBA operates . Its about time one of you guys got the truth in writing from the horses mouth dont you think ?

IF bullion baron can get information about gold reserves im sure someone can get that information .
 
bordsilver said:
The simple reality is that no bank engaged in fractional reserve banking can pay its debts as and when they fall due, because a significant proportion of current liabilities (cash deposits) have been lent out and are no longer possessed by the bank.

Consequently, all banks engaged in the practice are inherently insolvent.
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Er...no, the cash that's been lent out is an asset on the bank's books. Assets can be borrowed against.

If a customer rocks up and withdraws their money, the loan that the bank made using those funds acts as security for another bank to lend the first bank some money until another customer turns up and deposits some cash to replace it.
 
bordsilver,


"The simple reality is that no bank engaged in fractional reserve banking can pay its debts as and when they fall due, because a significant proportion of current liabilities (cash deposits) have been lent out and are no longer possessed by the bank."


In banking circles, we call that "borrowing short and lending long".

It is in fact what all banks do, the customer comes in and lodges money, often 'at call' or on term deposit of maybe 12 months. The Bank lends it out to a business for maybe 5 years, or to a home buyer for 30 years.

Thus if a bank is confronted by a 'run', it has no possible hope of meeting ALL of the demands. It has always been so, and always will be.

The bank is insolvent, and MUST close its doors.


OC
 
bordsilver said:
The simple reality is that no bank engaged in fractional reserve banking can pay its debts as and when they fall due
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Thank you.

This is the sad indisputable truth of our current banking system yet is the most defended by those that fail to see the faults that are inherent in FRB. And the only defence that supporters of FRB can come up with ultimately is "it is highly unlikely everyone will lob up to a bank at the same time and demand to withdraw their deposit." ????????

Talk about optimism in the face of an ultimate defeat. :lol:

Fiat money makes the FRB possible. Fake money, fake banking, fake feelings of satisfaction, fake feelings of security.

FRB is indefensible.
 
Reno: This has nothing to do with the RBA. The RBA can never go bankrupt because they can always issue as much currency as they want to.

Big A.D.: That is not a refutation to the simple fact that their time profiles don't match. You are simply pointing out that a bank can try to prevent the impact of a bank run by getting another bank to increase their FRB. This kick the can ability is limited only by the number of players (i.e. banks) and ultimately by the presence of a central bank.

I am not pointing out anything that is not openly known by the banks and regulators. They fear a bank run because they are fundamentally insolvent. It's mainstream knowledge ffs.
 
Borrowing short and lending long, and its possible consequences, has NOTHING to do with 'fractional reserve banking'.

The 'Reserves' cannot possible cover demand for immediate payment by depositors.

OC
 
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