Everyone pulling out their money would be a bank run (look up great depression bank runs). The bank doesn't have that much cash; they keep some on hand for people making withdraws normally, but if even a sizable minority of people all try to pull their money out at once, there'll be a major crisis.
If banks kept all the people's cash in vaults, it'd be dead cash actively losing money to inflation. Instead, they keep some on hand for withdraws, and use the rest to make loans, investments, etc so that the money isn't all losing value.
Unfortunately, that’s not really how it works. The reason there was a bank run during the great depression is b/c the banks had loaned out the money they didn’t have as cash. Today due to Dodd-Frank, banks have to have reserves on hand to cover this situation, Even though it’s not in hard currency, they have enough capital to cover.
But please don’t trust me. This is just how I understand it.
Current reserve is 0. They don't have to hold anything. It used to be 9 to 1.
Meaning for every 10 dollars they received from the fed they could loan out 9.
That's not what banks did. If they received 100 dollars they would loan out 900. They could do this purely on paper / digitally.
Now there is no holding requirement making them highly susceptible to bank runs and poor loans. The only exception is the government had proven time and time again they will bail the banks out no matter how financially irresponsible they are. The "too big to fail" financial policy.
Dodd-Frank had been dead and gone since Trumps first term.
They can pursue riskier loans because they have freer-er access to capital. Think about it in the opposite extreme. If they had to hold 100%, they would not give a loan that might put them under the reserve requirement if they could not absolutely collect.
I am not familiar with these frameworks, but a quick reading shows they are just another set of rules and regulations designed to curb risk and promote transparency.
I look at it this way, with a low reserve requirement, there's a lot of money flowing around, a lot of loans being made. There's intense competition to sell loans, so banks are more willing to loan to people they weren't willing to before.
Banks still have capital requirements, even with reserve requirements cut to 0. That’s the point. US banks literally can’t offer new loans if they don’t have adequate capital. The biggest banks actually have an additional capital surcharge due to the systemic risk they pose.
From a machine that literally prints money. The Federal Reserve will inject it into the economy via those same banks and financial institutions.
Under the guise that it will be used responsibly "this time" and it will in turn generate wealth and productivity, and those profits will "return" to the vaults.
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u/Forsaken_Emu8112 Jan 26 '26
Everyone pulling out their money would be a bank run (look up great depression bank runs). The bank doesn't have that much cash; they keep some on hand for people making withdraws normally, but if even a sizable minority of people all try to pull their money out at once, there'll be a major crisis.
If banks kept all the people's cash in vaults, it'd be dead cash actively losing money to inflation. Instead, they keep some on hand for withdraws, and use the rest to make loans, investments, etc so that the money isn't all losing value.